UNITED STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549




















(Mark
One)


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


o
            For the fiscal year ended
      December 30, 2009


OR


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


 ̈
            For the transition period from
      ________ to _________




Commission
file number 333-115644









EPL Intermediate, Inc.


(Exact
name of registrant as specified in its charter)





Delaware
                  (State
      or other jurisdiction of
                  Incorporation
      or organization)
                
                13-4092105
                  (I.R.S.
      Employer
                  Identification
      No.)3535
      Harbor Blvd., Suite 100
                  Costa
      Mesa, California
                  (Address
      of principal executive offices)
                
                92626
                  (Zip
      Code)





Registrant’s
telephone number, including area code (714) 599-5000











Securities
registered pursuant to Section 12(b) or Section 12(g) of the Act:
None












Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes o No x




Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes o No x




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 x Noo





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 o     No
o




Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. x




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 o
                Accelerated filer o
                Non-accelerated filer x
                Smaller reporting company o





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


The
common stock of the registrant is not publicly traded and is held 100% by an
affiliate.


An
aggregate of 100 shares of common stock of the registrant were outstanding as of
March 15, 2010.





Documents Incorporated By
Reference





None.





TABLE
OF CONTENTS




FORM
10-K





PageForward-Looking
      Statements
                    
                    3Item
      1.
                    
                    Business.
                    
                    3Item
      1A.
                    
                    Risk
      Factors.
                    
                    9Item
      1B.
                    
                    Unresolved
      Staff Comments.
                    
                    18Item
      2.
                    
                    Properties.
                    
                    18Item
      3.
                    
                    Legal
      Proceedings.
                    
                    19Item
      4.
                    
                    Reserved.
                    
                    20Item
      5.
                    
                    Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities.
                    
                    20Item
      6.
                    
                    Selected
      Financial Data.
                    
                    20Item
      7.
                    
                    Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations.
                    
                    22Item
      7A.
                    
                    Quantitative
      and Qualitative Disclosure About Market Risk.
                    
                    36Item
      8.
                    
                    Financial
      Statements and Supplementary Data.
                    
                    37Item
      9.
                    
                    Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure.
                    
                    37Item
      9A.
                    
                    Controls
      and Procedures.
                    
                    37Item
      9B.
                    
                    Other
      Information.
                    
                    37Item
      10.
                    
                    Directors,
      Executive Officers and Corporate Governance.
                    
                    37Item
      11.
                    
                    Executive
      Compensation.
                    
                    40Item
      12.
                    
                    Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters.
                    
                    54Item
      13.
                    
                    Certain
      Relationships and Related Transactions and Director
      Independence.
                    
                    54Item
      14.
                    
                    Principal
      Accountant Fees and Services.
                    
                    55Item
      15.
                    
                    Exhibits
      and Financial Statement Schedules.
                    
                    56


i


FORWARD-LOOKING STATEMENTS




Certain
statements contained within this report constitute “forward-looking statements”
within the meaning of the Private Securities Litigation Reform Act of 1995.
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.
They may 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
events and are based on assumptions and are subject to risks and uncertainties.
Also, these forward-looking statements present our estimates and assumptions
only as of the date of this report. Except for our ongoing obligation to
disclose material information as required by federal securities laws, we do not
intend to provide any updates 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 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; and litigation we face in connection
with our operations. Actual results may differ materially due to these risks and
uncertainties and those discussed below. See “Item 1A. Risk
Factors.”





PART 1




Item 1. Business.




Our
Company




EPL
Intermediate, Inc. (“EPLI” or “Intermediate”) through its wholly-owned
subsidiary El Pollo Loco, Inc. (“EPL” and collectively with EPLI, 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. 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 QSR chains. As of December 30, 2009, our
restaurant system consisted of 415 restaurants made up of 172 company-operated
restaurants and 243 franchised restaurants located primarily in California with
additional restaurants in Arizona, Colorado, Connecticut, Georgia, Illinois,
Missouri, Nevada, New Jersey, Oregon, Texas, Utah and Virginia.




Our
concept originated in Guasave, Mexico in 1975, and the first U.S. El Pollo Loco
restaurant opened in Los Angeles in 1980. Our typical restaurant is a
free-standing building with drive-thru service that ranges in size from
approximately 2,200 to 2,600 square feet with seating for approximately 60
people. Our menu features our authentic recipe citrus marinated flame-grilled
chicken that is freshly prepared daily, most of which we prepare from scratch
using fresh, high-quality ingredients. We serve a variety of individual and
family-size chicken meals, which include flour or corn tortillas,
freshly-prepared salsa and a variety of signature side orders such as Spanish
rice and pinto beans. In addition, we offer a wide variety of contemporary,
Mexican-inspired entrees including our specialty Pollo Bowl®, Pollo
Salads, signature burritos, and chicken tacos. Our individual and family-size
meals appeal to customers for restaurant dining or take-out during dinner time,
while our more portable Mexican entrees appeal to customers at lunch time or on
the go.


3


Business
Strategy




Increase Same-Store Sales.Prior to the recession that began in 2008,we had a strong track
record of growing our same-store sales through a balanced mix of increasing
customer traffic and average check. However the economic downturn has negatively
affected our same-store sales and there is no assurance we will be able to
achieve same-store sales growth in the near future. See “Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations.” We
plan to continue to seek to improve same-store sales by:




·
            Increasing Customer
      Traffic. We focus on driving transaction volume, which we refer to
      as customer traffic, by introducing new items that complement our core
      product base and by promoting menu items designed to deliver value in a
      highly competitive marketplace. We also continue to roll out innovative
      limited time offerings to generate repeat visits and attract new
      customers.




·
            Enhancing AverageCheck. Our strategy to
      enhance the average customer transaction amount includes selling add-on
      menu items, including soup, salads, sides and desserts, to complete
      customer meals, as well as introducing new products across multiple price
      points.




·
            Executing Our Targeted
      Marketing Plan. Our empirical, data driven approach to marketing
      helps us to determine optimal pricing strategies and value promotions,
      introduce products that reflect customer taste preferences and target
      advertising based on demographic
profiles.




·
            Enhancing Speed of
      Service. We continue to implement initiatives to improve the speed
      of service for our customers, including a labor scheduling system,
      drive-thru timing reporting system, and registers at each drive-thru
      location.




Improve our Operations. We
have identified several strategies which we believe may increase our operational
efficiency and
reduce our costs, including:




·
            Improving Restaurant
      Operations. We intend to continue to improve restaurant operations
      through the use of our rigorous scorecard system and by implementing new
      information technology initiatives, improved food cost management,
      production forecasting and labor scheduling tools. We also focus on
      minimizing restaurant employee turnover, which significantly reduces
      training cost and improves
productivity.




·
            Leveraging Our Existing
      Infrastructure. Our infrastructure is sufficient to support growth
      without significant additional expense. Therefore, we can increase
      operating leverage over time by adding new stores to the extent that
      our revenue grows faster than our general and administrative
      expenses.




·
            Growing High Margin Franchise
      Revenue. We continue to emphasize franchise development, which is
      expected to increase the percentage of our total revenue generated from
      franchise royalties over time. The growth of our high margin franchise
      revenue is expected to increase our profitability once the economy
      improves and our franchisees are able to expand. In response to the
      current economic environment, we have developed and are adjusting our
      growth strategy to focus on a new restaurant prototype, called Gen3, which
      should significantly reduce the capital required to open a new unit and
      enhance returns on invested capital. We believe this lower cost restaurant
      will appeal to our franchisees and make it easier and more profitable for
      franchisees to open new units. The Gen3 is designed to offer the same
      features of a typical 2,400 square foot free-standing drive-thru
      restaurant, at approximately half the capital expenditure cost. The Gen3,
      which will range from 1,800 to 2,200 square feet, will also have a shorter
      build-out period than our existing restaurant
  design.




Increase Penetration of Existing
Markets.We plan on continuing to open new company-operated and franchise
restaurants in our existing core markets. We have a significant presence in the
greater Los Angeles area, and we believe that a significant long term
opportunity for new store growth remains in all of our markets. Our current
market strategy is to develop new company-operated restaurants in the greater
Los Angeles area, Las Vegas, and the Central Valley of California, and to
partner with experienced operators in Arizona and the other regions of
California. Our extensive operational and site selection expertise in the
greater Los Angeles area, Las Vegas and the Central Valley create a strong
platform on which to grow our company-operated restaurant base.




In 2009,
we opened four company-operated restaurants and eight franchised restaurants in
existing and new markets. We plan to open approximately two new company-operated
restaurants in fiscal 2010. As of December 30, 2009, we had fifteen signed
franchise development agreements with seven franchisees to open an additional
thirty restaurants in our existing markets. We believe our franchisees will open
approximately three new restaurants in fiscal 2010.




Selectively Develop New Markets with
a Combination of Company Store Growth and Experienced Local Operators.We
believe that our distinct product offering and unique brand will appeal to
consumers in numerous markets throughout the United States. As of December 30,
2009, we were legally authorized to market franchises in 45 states. Our approach
to franchise development in new markets involves the identification of an
experienced, local operator, followed by a rigorous analysis of market potential
before we enter into a franchise development agreement. We plan to partner with
experienced operators in new markets to be able to leverage local operational
and real estate expertise which may generate high margin royalty revenue for us
and limit our capital investment. In 2009, our franchisees opened three
restaurants in California, one in New Jersey, one in Illinois, one in Missouri,
one in Oregon and one in Virginia. We will also selectively evaluate
opportunities to acquire franchisee owned units in markets where we believe
there is an opportunity for us to leverage our existing infrastructure or better
develop the market.


4


Acquisitions
of Restaurants




On
September 24, 2009 EPL purchased four El Pollo Loco restaurants located in the
Atlanta, Georgia area previously owned and operated by an EPL franchisee, Fiesta
Brands, Inc., and related assets, and assumed various operating contracts,
including the leases, relating to the four purchased restaurants. EPL will
continue to operate the four purchased restaurants. EPL also purchased
furniture, fixtures and equipment of five other El Pollo Loco restaurants
previously operated by Fiesta Brands, Inc. which have been closed. The purchase
price of $1.7 million consisted of cash and was accounted for using the purchase
method of accounting in accordance with Accounting Standards Codification (“ASC”
805-10, Business Combinations), previously Financial Accounting Standards No.
141(R) Business Combinations(“FAS 141(R)”). The Company’s allocation of the purchase price to the
fair value of the acquired assets was as follows: equipment, $0.4 million and
building and leasehold improvements, $1.3 million. Results of operations of the
Atlanta restaurants are included in the Company’s financial statements beginning
as of the acquisition date. Fiesta Brands, Inc. is an affiliate of the Company’s
principal stockholders and certain Company directors. See Item 11, “Executive
Compensation – Compensation Committee Interlocks and Insider Participation –
Purchase of Restaurants and Termination of Development Agreement.”




Restaurant
Operations and Products




Restaurant Operations and
Management. Our management team places tremendous emphasis on executing
our mission, which is to “Passionately Serve Perfect Pollo Every Time.” To help
ensure that we deliver on this mission, we have 19 area leaders and three
directors of operations for our company-operated stores that report to our
senior vice president of operations. Each area leader typically oversees nine to
ten restaurants. General Managers supervise the operations of each restaurant,
and they are supported by a number of assistant managers, which varies based on
the sales volume of the respective restaurant.




We strive
to maintain quality and consistency in our restaurants through the careful
training and supervision of personnel and the establishment of standards
relating to food and beverage preparation, maintenance of facilities and conduct
of personnel. Restaurant general managers, many of whom are promoted from our
restaurant personnel, must complete a training program of typically six to
twelve weeks during which we instruct them in various areas of restaurant
management, including food quality and preparation, hospitality and employee
relations. We also provide restaurant managers with operations manuals relating
to food preparation and operation of restaurants. These manuals are designed to
ensure uniform operations, consistently high-quality products and service and
proper accounting for restaurant operations. We hold regular meetings of our
restaurant managers to discuss new menu items and efficiency initiatives and to
continue training in various aspects of business management. We have created a
set of quantitative metrics that are used to measure the performance of both the
general managers and area leaders. These metrics measure profitability, food
safety, employee safety and various customer satisfaction attributes. We make
this data “information that cannot be ignored” by producing a monthly scorecard,
holding quarterly meetings, and considering these metrics for bonus purposes and
job performance evaluations.




We have
food safety and quality assurance programs that are designed to maintain the
highest standards for food and food preparation procedures used by
company-operated and franchised restaurants. We have a team of quality assurance
managers that perform comprehensive restaurant audits. Quality assurance
managers visit each company-operated and franchised restaurant an average of two
times a year and evaluate all areas of food handling, preparation and storage.
Our quality assurance team also audits our suppliers on a frequency schedule
based on the potential food safety risk of each product. In 2009, there were
over 1,000 quality control site visits to restaurants and third party
contractors verified plant compliance for approved suppliers to El Pollo Loco by
conducting 88 audits at various suppliers. We also have continuous food safety
training that teaches employees to pay detailed attention to product quality at
every stage of the food preparation cycle.




We
maintain financial and accounting controls for each of our company-owned
restaurants through the use of centralized accounting and management information
systems and reporting requirements. We collect sales, credit card, gift card,
menu item popularity and related information daily for each company-operated
restaurant. We provide general managers with monthly operating statements for
their respective restaurants. Cash, credit card, and gift card receipts are
controlled through daily deposits which are picked up by armored cars. At our
support center, we use a software program to reconcile on a daily basis the
sales and cash information sent electronically from our restaurants to the cash
detail electronically sent by our bank.




We devote
considerable attention to controlling product costs, which are a significant
portion of our restaurant expenses. We make extensive use of information
technology to provide us with pertinent information on ideal food cost,
inventory levels and inventory cost variances and to maintain inventory and cash
management controls.


5


Menu and Food Preparation. We
are committed to serving quality chicken and Mexican-inspired food. In preparing
menu items, we emphasize quality and freshness. We regularly inspect our vendors
to ensure both that the products we purchase conform to our high-quality
standards and that the prices offered are competitive. We are committed to
differentiating ourselves from other QSR competitors by utilizing fresh,
high-quality ingredients as well as by preparing many of our items from scratch.
Most of the menu items at each of our restaurants are prepared at that
restaurant from fresh chicken and ingredients delivered several times each week.
All of our menu items are trans fat free, from our tortillas to the oil used to
prepare our chips.





Our
marinated, flame-grilled chicken is the key ingredient in many of our menu
items. Fresh chickens are marinated in our restaurants twice a day, using
marinating tumblers to ensure that our proprietary marinade deeply and
consistently flavors the chicken. The cooking process on our extensive grill
system does not employ any timers, so our cooks must use acquired experience to
turn the chicken at the proper intervals in order to deliver our signature
chicken to our customers. We believe our singular focus on delivering high
quality, freshly-prepared chicken, from senior management down, creates loyalty
and enthusiasm for the brand among our customers and employees.




Our
chicken is served with flour or corn tortillas, freshly-prepared salsas and a
wide variety of side orders including Spanish rice, pinto beans, coleslaw and
mashed potatoes. In addition to individual and family chicken meals in
quantities of 8 and 12 pieces, we also serve a wide variety of contemporary
Mexican entrées including specialty chicken burritos, our specialty Pollo Bowl®,
fresh Pollo Salads, chicken tortilla soup, chicken tacos and taquitos. To
complement our menu items, a salsa bar in the majority of our locations features
four kinds of salsa prepared daily with fresh ingredients. We also serve the
Fosters Freeze® brand of soft-serve ice cream products in 71 company-operated
restaurants and 88 franchised restaurants.




Marketing
and Advertising




Marketing Strategy. We strive
to be the consumer’s top choice for flavor by serving high-quality meals,
featuring our signature flame-grilled chicken, inspired by traditional Mexican
cuisine. We seek to build long-term relationships with consumers based on a
complete brand experience. With our brand’s authentic roots and our
high-quality, tasty food, we attempt to inspire our consumers not only to
frequent the brand, but also to generate other customers by
word-of-mouth.




Through
our strategic marketing efforts and unique product offerings, we believe we have
positioned ourselves into the “sweet spot” between the QSR and fast casual
restaurant segments. We believe consumers find our restaurant experience
superior to traditional fast food restaurants but not as high-priced or
inconvenient as fast casual restaurants.




Promotional/Discount
Strategy. We develop promotions designed to deliver value in a highly
competitive marketplace.





Advertising Strategy. We have
developed key consumer insights that define consumer segments and their
motivators. Our advertising is designed to capture our brand by stirring
consumers’ preferences for wholesome, flavorful food without compromising
convenience. Our advertising strategy is centered on our signature marinated
flame-grilled chicken.




Annual
advertising expenditures are approximately 4% of company-operated and franchised
restaurant revenue in the Los Angeles market area and 5% of company-operated and
franchised restaurant revenue in markets outside of the Los Angeles market
area.




Intellectual
Property




We have
registered El Pollo Loco®, Pollo Bowl®, The Crazy Chicken® and certain other
names used by our restaurants as trademarks or service marks with the United
States Patent and Trademark Office and in approximately 43 foreign countries. In
addition, El Pollo Loco’s logo and Web site name and address are our
intellectual property. The success of our business strategy depends on our
continued ability to use our existing trademarks and service marks in order to
increase brand awareness and further develop our branded products. If our
efforts to protect our intellectual property are unsuccessful, or if any third
party misappropriates or infringes on our intellectual property, either in
print, on the Internet or through other media, the value of our brands may be
harmed, which could have a material adverse effect on our business, including
the failure of our brands and branded products to achieve and maintain market
acceptance. Our policy is to pursue and maintain registration of our service
marks and trademarks in those countries where our business strategy requires us
to do so and to oppose vigorously any infringement or dilution of our service
marks or trademarks in such countries.




We
maintain the recipe for our chicken marinade, as well as certain proprietary
standards, specifications and operating procedures, as trade secrets or
confidential proprietary information. We may not be able to prevent the
unauthorized disclosure or use of our trade secrets or proprietary information,
despite the existence of confidentiality agreements and other measures. If any
of our trade secrets or proprietary information were to be disclosed to or
independently developed by a competitor, our business, financial condition and
results of operations could be materially adversely affected.


6


Franchise
Program




We use
franchising as our strategy to accelerate new restaurant growth in certain new
markets, leveraging the ownership of entrepreneurs with specific local market
expertise and requiring a relatively minimal capital commitment by us. As of
December 30, 2009, there were a total of 243 franchised restaurants (241
franchised and two licensed, operating at Universal Studios Theme Park in Los
Angeles, California and Foxwoods Casino in Connecticut). Franchisees range in
size from single restaurant operators to our largest franchisee, which operated
53 restaurants as of December 30, 2009. We employ three franchise consultants
who work with franchisees to maintain system-wide quality. These consultants
assist franchisees with new site proposals, new restaurant openings, marketing
programs and ongoing operations activities. To support future growth in
franchise restaurants, we have a team of franchise management professionals
focusing on franchise sales, operations, field marketing, training, real estate
and purchasing.




Our
standard franchise agreement gives our franchisees the right to use our
trademarks, service marks, trade dress and our proprietary recipes, systems,
manuals, processes and related items. We also provide our franchisees with
access to training, marketing, quality control, purchasing, distribution and
operations assistance. We are not obligated to and currently do not provide nor
plan to provide any direct or indirect financing or financing guarantees for our
franchisees. The franchisee is required to pay an initial franchise fee of
$40,000 for a 20-year franchise term per restaurant and in most cases, a renewal
fee for a successor franchise agreement beyond the initial term. The initial
franchise fee is reduced to $30,000 for second and subsequent restaurants opened
under a development agreement. The franchisee is also required to pay monthly
royalty fees of 4% of net sales as well as monthly advertising fees of 4% of net
sales for the Los Angeles designated market area or 5% of net sales for other
markets. Our company-operated restaurants contribute 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 brand.




Our
development agreements generally grant exclusive rights to a prospective
franchisee, who may be an existing franchisee, to develop a specified number of
restaurants in a defined territory within a specified period of time. The
development agreement typically requires the opening of three or more
restaurants, with the first restaurant to be opened within eighteen months after
execution of the development agreement and each subsequent restaurant to be
opened within twelve-month intervals thereafter. The development agreements
typically outline a schedule of requirements that the prospective franchisee
must meet, such as site selection and acquisition, and typically require the
developer to use diligent efforts to obtain government approvals and complete
construction in order to open the restaurants as scheduled. If a prospective
franchisee who has been granted an exclusive territory fails to meet the
schedule set forth in the development agreement, the prospective franchisee
could lose its exclusive rights in the defined territory and, in certain
circumstances, the development agreement and the right to open our restaurants
could terminate. Under the development agreement, we collect a development fee
of $10,000 per restaurant, which is applied to the initial franchise fee when
the franchise agreement for a restaurant is signed or, in certain circumstances,
to other amounts due from the franchisee. In some circumstances, when a
prospective franchisee does not meet the development schedule and the
development agreement is terminated or expires, the development fee may be
forfeited. See Item 1A “Risk Factors” and Item 7 “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” for a discussion of
the effects that the recession and liquidity crisis have had on our
franchisees.




Under our
agreement with Fosters Freeze International, Inc., our franchisees in California
may also enter into a sublicense agreement with us under which they may sell a
limited Fosters Freeze® menu in their restaurants.




As a
result of an initiative beginning in the mid-1990’s to transfer certain
company-operated restaurants to new franchisees, some franchisees sublease their
restaurants from us. However, most franchisees currently either purchase the
real estate upon which the restaurants are operated or enter into direct leases
with third-party owners of real estate.




Purchasing




Our
ability to maintain consistent quality throughout our restaurants depends in
part upon the ability to acquire food products and related items from reliable
sources in accordance with our specifications. We have a contract with one
national distributor for substantially all of the food and supplies, including
the chicken that our company-operated restaurants receive from our suppliers.
Fresh chicken is typically delivered every other day to each restaurant. We have
a five-year distribution agreement with our long-standing distributor, which
expires August 15, 2010. We are currently evaluating bids from multiple
suppliers. Currently, all franchisees are required to use this distributor as
the sole approved distributor and they must purchase food and supplies only from
approved suppliers.


7


We
regularly inspect vendors to ensure both that the products purchased conform to
our high-quality standards and that the prices offered are competitive. To
support this, we have a quality assurance team that performs comprehensive
supplier audits on a frequency schedule based on the potential food safety risk
of each product. With the exception of our distributor and chicken and beverage
suppliers, we normally contract for food and paper items at fixed price
contracts ranging from several months to two years.




Historically,
we have been able to limit our exposure to chicken price volatility through
supply contracts ranging in term from one to three years and through menu price
increases. On March 1, 2009, new contracts with four chicken suppliers went into
effect. Two of the contracts have a floor and ceiling price for chicken with a
term of two years. The other two contracts were for one year and had fixed
pricing for the term. In March of 2010, two of the four contracts expired with
only one of the two expiring contracts being renewed. The renewed contract is
for two years and has a fixed price for the term of the agreement. The new
chicken contract that we entered into in 2010 has pricing that is relatively
flat compared to the prior year’s expired contract.




Competition




We
operate in the restaurant industry, which is highly competitive and fragmented.
The number, size and strength of competitors vary by region. Competition
includes a variety of locally owned restaurants and national and regional chains
that offer dine-in, carry-out and/or delivery services. Our competition in the
broadest perspective includes restaurants, pizza parlors, coffee shops, street
vendors, convenience food stores, delicatessens and supermarkets. We do not have
any direct competitors with respect to menus that feature marinated,
flame-grilled chicken. However, we indirectly compete with chicken-specialty
QSRs and Mexican QSRs, such as KFC, Church’s Chicken, Popeye’s Chicken &
Biscuits and Taco Bell, as well as fast casual restaurants and franchisors of
other restaurant concepts. We believe that QSR competition is based primarily on
quality, taste, speed of service, value, name recognition, restaurant
location and customer service. The fast casual restaurant industry is also
highly competitive. We believe that competition within the fast casual
restaurant segment is based primarily on price, taste, quality and the freshness
of the menu items as well as the comfort and ambiance of the
restaurant environment.




In
addition, we compete with franchisors of other restaurant concepts for
prospective franchisees.




Our
greatest strength in this competitive environment is our high-quality food. We
believe we are positioned to take advantage of a number of consumer trends,
including the impact of the Hispanic culture on food and flavors, growth of the
Mexican food segment, increased interest in healthy dining and the growth of the
Hispanic population in many regions of the United States, which should each
provide us with opportunities to grow our market position in existing and new
markets.





Regulation




Our
business is subject to extensive federal, state and local government regulation,
including those relating to, among others, public health and safety, zoning and
fire codes, and franchise sales. Failure to obtain or retain food or other
licenses would adversely affect the operations of our restaurants. Although we
have not experienced and do not anticipate any significant problems in obtaining
required licenses, permits or approvals, any difficulties, delays or failures in
obtaining such licenses, permits or approvals could delay or prevent the opening
of, or adversely impact the viability of, a restaurant in a particular area. We
operate, and our franchisees are required to operate, each of our restaurants in
accordance with standards and procedures designed to comply with applicable
codes and regulations.




The
development and construction of additional restaurants will be subject to
compliance with applicable zoning, land use and environmental regulations. We
believe that federal and state environmental regulations have not had a material
effect on our operations, but more stringent and varied requirements of local
government bodies with respect to zoning, land use and environmental factors
could delay construction and increase development costs for new
restaurants.




We also
are subject to the Fair Labor Standards Act, the Immigration Reform and Control
Act of 1986 and various federal and state laws governing such matters as minimum
wages, overtime, unemployment tax rates, worker’s compensation rates,
citizenship requirements and other working conditions. 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. We are also subject to the Americans With Disabilities Act,
which prohibits discrimination on the basis of disability in public
accommodations and employment, which may require us to design or modify our
restaurants to make reasonable accommodations for disabled persons. See “Item
1A. Risk Factors—Matters relating to employment and labor laws may adversely
affect our business” and “Item 3. Legal Proceedings.”


8


Many
states, including California, and the Federal Trade Commission require
franchisors to transmit specified disclosure statements to potential franchisees
when offering or modifying a franchise. Some states require us to register our
franchise offering documents and file our advertising material before we may
offer a franchise for sale. Our non-compliance could result in civil or criminal
penalty, rescission of a franchise, and suspension of our ability to offer and
sell franchises in a state. As of December 30, 2009, we were legally authorized
to market franchises in 45 states.





Environmental
Matters




Our
operations are also subject to federal, state and local laws and regulations
relating to environmental protection, including regulation of discharges into
the air and water, storage and disposal of waste and clean-up of contaminated
soil and groundwater. Under various federal, state and local laws, an owner or
operator of real estate may be liable for the costs of removal or remediation of
hazardous or toxic substances on, in or emanating from such property. Such
liability may be imposed without regard to whether the owner or operator knew
of, or was responsible for, the presence of such hazardous or toxic
substances.




Certain
of our properties may be located on sites that we know or suspect have been used
by prior owners or operators as retail gas stations. Such properties previously
contained underground storage tanks, and some of these properties may currently
contain abandoned underground storage tanks. We are aware of contamination from
a release of hazardous materials by a previous owner at two of our owned
properties and one of our leased properties. We do not believe that we have
contributed to the contamination at any of these properties. It is possible that
petroleum products and other contaminants may have been released at other
properties into the soil or groundwater. Under applicable federal and state
environmental laws, we, as the current owner or operator of these sites, may be
jointly and severally liable for the costs of investigation and remediation of
any contamination. Although we lease most of our properties, or when we own the
property we obtain certain assurances from the prior owner or often obtain
indemnity agreements from third parties, we cannot assure you that we will not
be liable for environmental conditions relating to our prior, existing or future
restaurants or restaurant sites. If we are found liable for the costs of
remediation of contamination at or emanating from any of our properties, our
operating expenses would likely increase and our operating results would be
materially adversely affected. As of December 30, 2009, we believe that the risk
of loss is remote.




Employees




As of
December 30, 2009, we had approximately 3,998 employees, of whom approximately
3,305 were hourly restaurant employees, 167 were salaried general managers
engaged in managerial capacities, 399 were assistant managers and 127 were
corporate and office personnel. Most of our restaurant employees are employed on
a part-time basis to provide services necessary during peak periods of
restaurant operations. None of our employees are covered by a collective
bargaining agreement. We believe that we generally have good relations with our
employees.




Item 1A. Risk Factors.





The
current economic crisis adversely impacted our business and financial results in
2008 and 2009 and a prolonged or “double-dip” recession could materially affect
us in the future.





The
restaurant industry is dependent upon consumer discretionary spending. The
economic crisis has reduced consumer confidence to historic lows, impacting the
public’s ability and/or desire to spend discretionary dollars as a result of job
losses, home foreclosures, significantly reduced home values, investment losses,
bankruptcies and reduced access to credit, resulting in lower levels of guest
traffic and lower check averages in our restaurants. As a result, our losses in
fiscal years 2008 and 2009 increased significantly due, to a large extent, to
lower revenues and impairment charges. If this difficult economic situation
continues for a prolonged period of time and/or deepens in magnitude, our
business, results of operations and ability to comply with the terms and
covenants of our debt agreements could be materially adversely affected and may
result in further deceleration of the number and timing of new restaurant
openings by us and our franchisees. Continued deterioration in customer traffic
and/or a reduction in average check amounts will negatively impact our revenues
and our profitability and could result in further reductions in staff levels,
additional impairment charges and potential restaurant closures.





The
failure to meet some of our debt covenants, and the impact of the current United
States liquidity crisis, could have a material adverse effect on our financial
condition.





Our
ability to manage our debt is dependent on our level of positive cash flow of
company and franchised stores that are operating, along with associated costs.
The economic downturn has negatively impacted our cash flows and has decelerated
our growth plans. The liquidity crisis that began in 2007 has adversely impacted
global credit markets, severely constrained liquidity conditions, and could make
it more difficult for us to refinance our existing debt or to obtain additional
debt or equity financing. Continuation of such constraints may increase our
costs of borrowing and could restrict our access to other potential sources of
future liquidity. Our failure to meet some of our debt covenants or to have
sufficient liquidity to make interest and other payments required by our debt
could result in a default of such debt and acceleration of the borrowings which
would have a material adverse effect on our business and financial
condition.


9


Any possible
instances of food-borne illness could reduce our restaurant sales.




We cannot
guarantee to consumers that our internal controls and training will be fully
effective in preventing all food-borne illnesses. Furthermore, our reliance on
third-party food processors makes it difficult to monitor food safety compliance
and may increase the risk that food-borne illness would affect multiple
locations rather than single restaurants. Some food-borne illness incidents
could be caused by third-party food suppliers and transporters outside of our
control, such as the peanut products contamination that occurred in early 2009
but did not impact EPL. New illnesses resistant to our current precautions may
develop in the future, or diseases with long incubation periods could arise,
that could give rise to claims or allegations on a retroactive basis. One or
more instances of food-borne illness in one of our company-operated or
franchised restaurants could negatively affect sales at all of our restaurants
if highly publicized. This risk exists even if it were later determined that the
illness was wrongly attributed to one of our restaurants. A number of other
restaurant chains have experienced incidents related to food-borne illnesses
that have had a material adverse impact on their operations, and we cannot
assure you that we can avoid a similar impact upon the occurrence of a similar
incident at our restaurants.





Negative
publicity could reduce sales at some or all of our restaurants.




We are,
from time to time, faced with negative publicity relating to food quality, the
safety of chicken, which is our principal food product, restaurant facilities,
customer complaints or litigation alleging illness or injury, health inspection
scores, integrity of our or our suppliers’ food processing, employee
relationships or other matters at one of our restaurants. Negative publicity may
adversely affect us, regardless of whether the allegations are valid or whether
we are held to be responsible. In addition, the negative impact of adverse
publicity relating to one restaurant may extend far beyond the restaurant
involved to affect some or all of our other restaurants. The risk of negative
publicity is particularly great with respect to our franchised restaurants
because we are limited in the manner in which we can regulate them, especially
on a real-time basis. A similar risk exists with respect to food service
businesses unrelated to us, if customers mistakenly associate such unrelated
businesses with our own operations. Employee claims against us based on, among
other things, wage and hour violations, discrimination, harassment or wrongful
termination may also create negative publicity that could adversely affect us
and divert our financial and management resources that would otherwise be used
to benefit the future performance of our operations. A significant increase in
the number of these claims or an increase in the number of successful claims
could materially adversely affect our business, financial condition, results of
operations and cash flows.





The prospect of a
pandemic spread of avian flu could adversely affect our business.




If avian
flu were to affect our supply of chicken, our operations may be negatively
impacted, as prices may rise due to limited supply. In addition,
misunderstanding by the public of information regarding the threat of avian flu
could result in negative publicity that could adversely affect consumer spending
and confidence levels. A decrease in traffic to our restaurants as a result of
this potential negative publicity or as a result of health concerns, whether or
not warranted, could materially harm our business.





Increases in the
cost of chicken, including the impact on chicken prices due to the increased
price of corn because of ethanol demand, could materially adversely affect our
operating results.




Our
principal food product is chicken. During fiscal 2007, 2008 and 2009, the cost
of chicken included in our product cost was approximately 13.4%, 13.7% and
14.0%, respectively, of our revenue from company-operated restaurants. Material
increases in the cost of chicken could materially adversely affect our business,
operating results and financial condition. Changes in the cost of chicken can
result from a number of factors, including seasonality, increases in the cost of
grain, disease and other factors that affect availability and greater
international demand for domestic chicken products. Also, chicken suppliers have
recently reduced egg sets (fertile eggs placed in incubators), which decreases
the supply of chicken in the marketplace and has the effect of keeping chicken
prices higher.  A major driver in the price of corn, which is the primary
feed source for chicken, is the increasing demand for corn by the ethanol
industry as an alternative fuel source. There have been many new ethanol plants
opening in the United States, and most of these plants use corn as the primary
source of grain to make ethanol. This increased demand on the nation’s corn crop
has had and may continue to have an adverse impact on chicken prices. It is
anticipated that chicken prices in the foreseeable future will fluctuate at an
elevated level compared to pricing prior to 2008. We currently do not engage in
futures contracts or other financial risk management strategies with respect to
potential price fluctuations in the cost of chicken or other food and supplies,
which we purchase at prevailing market or contracted prices. We seek to limit
our exposure to chicken price fluctuations through contracts with suppliers
ranging in term from one to three years. Although we have implemented menu price
increases in the past to significantly offset the higher prices of chicken, due
to competitive pressures and the declining economic environment, we did not
increase prices in 2009 and there is no assurance we can do so in the future. If
we do implement menu price increases in the future to protect our margins, check
averages and restaurant traffic could be materially adversely
affected.


10


We rely on only
one company to distribute substantially all of our products to company-operated
and franchised restaurants, and on a limited number of companies as our
principal chicken suppliers. Failure to receive timely deliveries of food or
other supplies could result in a loss of revenue and materially and adversely
impact our operations.




Our and
our franchisees’ ability to maintain consistent quality menu items significantly
depends upon our ability to acquire fresh food products, including the highest
quality chicken and related items, from reliable sources in accordance with our
specifications on a timely basis. Shortages or interruptions in the supply of
fresh food products caused by unanticipated demand, problems in production or
distribution, contamination of food products, an outbreak of poultry diseases,
inclement weather or other conditions could materially adversely affect the
availability, quality and cost of ingredients, which would adversely affect our
business, financial condition, results of operations and cash flows. We have
contracts with a limited number of suppliers of most chicken, food and other
supplies for our restaurants. In addition, one company distributes substantially
all of the products we receive from suppliers to company-operated and franchised
restaurants. If that distributor or any supplier fails to perform as anticipated
or seeks to terminate agreements with us, or if there is any disruption in any
of our supply or distribution relationships for any reason, our business,
financial condition, results of operations and cash flows could be materially
adversely affected. Our inability to replace our suppliers in a short period of
time on acceptable terms could increase our costs and cause shortages at our
restaurants that may cause our company-operated or franchised restaurants to
remove certain items from a restaurant’s menu or temporarily close a restaurant.
If we or our franchisees temporarily close a restaurant or remove popular items
from a restaurant’s menu, that restaurant may experience a significant reduction
in revenue during the time affected by the shortage and thereafter if our
customers change their dining habits as a result.





As most of our
restaurants are concentrated in the greater Los Angeles area, our business is
highly sensitive to events and conditions in the greater Los Angeles
area.




Our
company-operated and franchised restaurants in the greater Los Angeles area
generated, in the aggregate, approximately 86% of our revenue in fiscal 2009 and
approximately 80% in fiscal 2008. In 2008 and 2009, our business was materially
adversely affected by a significant decrease in revenue from these restaurants
due to the adverse economic conditions in Southern California. Adverse changes
in the demographic, unemployment or economic conditions or an adverse regulatory
climate in the greater Los Angeles area or the state of California have had and
may continue to have a material adverse effect on our business. As of January
2010, unemployment in California was 12.5% compared to the U.S unemployment rate
of 9.7%. We believe that increases in unemployment will have a negative impact
on traffic in our restaurants. Additionally, California, Nevada, and Arizona,
where we have over 94% of our restaurants, are among the areas most impacted by
declining home prices and increased foreclosures. As a result of our
concentration in these markets, we have been disproportionately affected by
these adverse economic conditions compared to other national chain restaurants.
 We may also suffer unexpected losses resulting from natural disasters or
other catastrophic events affecting these areas, such as earthquakes, fires,
explosions, or other natural or man-made disasters. The incidence and severity
of catastrophes are inherently unpredictable and our losses from catastrophes
could be substantial.





Our growth
strategy depends in part on opening restaurants in new and existing markets and
expanding our franchise system. We may be unsuccessful in opening new
restaurants or establishing new markets, which could adversely affect our
growth.




Our
ability to open new restaurants is dependent upon a number of factors, many of
which are beyond our control, including our or our franchisees’ ability
to:





•
            identify available and suitable
      restaurant sites;





•
            compete for restaurant
      sites;





•
            reach acceptable agreements
      regarding the lease or purchase of
  locations;





•
            obtain or have available the
      financing required to acquire and operate a restaurant, including
      construction and opening
costs;


11


•
            timely hire, train and retain the
      skilled management and other employees necessary to meet staffing
      needs;





•
            obtain, for an acceptable cost,
      required permits and regulatory approvals;
  and





•
            control construction and
      equipment cost increases for new
  restaurants.




If we are
unable to open new restaurants or sign new franchisees, or if restaurant
openings are significantly delayed, our earnings or revenue growth could be
adversely affected and our business negatively affected as we expect a portion
of our growth to come from new locations.




As part
of our longer term growth strategy, we expect to enter into geographic markets
in which we have little or no prior operating or franchising experience through
company store growth and through franchise development agreements. We currently
have executed development agreements for new restaurants in markets such as
Missouri, Illinois, Virginia, New York and New Jersey states. The challenges of
entering new markets include: difficulties in hiring experienced personnel;
unfamiliarity with local real estate markets and demographics; consumer
unfamiliarity with our brand; and different competitive and economic conditions,
consumer tastes and discretionary spending patterns than our existing markets.
 Consumer recognition of our brand has been important in the success of
company-operated and franchised restaurants in our existing markets. Any failure
on our part to recognize or respond to these challenges may adversely affect the
success of our new restaurants. Expanding our franchise network could require
the implementation of enhanced business support systems, management information
systems, financial controls as well as additional management, franchise support
and financial resources.





At the
end of 2009, we had 21 restaurants open in new markets east of the Rockies. In
2009, six stores in these areas closed due to low sales. The 21 open stores are
experiencing a wide range of sales, and a majority of them have sales volumes
that are significantly less than the chain average due to lack of brand
awareness in the new markets. The failure of a significant number of restaurants
that open in new markets, or our failure to provide our franchisees with
adequate support and resources, could materially adversely affect our business,
financial condition, results of operations and cash flows.




As part
of our growth strategy, we also intend to open new restaurants in areas where we
have existing restaurants. Since we typically draw customers from a relatively
small geographic area around each of our restaurants, the operating results and
comparable restaurant sales for our restaurants could be adversely affected due
to close proximity with our other restaurants and market
saturation.





The challenging
economic environment has adversely affected our franchisees, with adverse
consequences to us.




We rely
in part on our franchisees and the manner in which they operate their locations
to develop and promote our business. Our top ten franchisees operate
approximately half of our franchised restaurants and one franchisee (the
“Significant Franchisee”) operates approximately 22% of our franchised
restaurants. Due to the continuing challenging economic environment it is
possible that some franchisees could file for bankruptcy or become delinquent in
their payments to us, which could have significant adverse impacts on our
business due to loss or delay in payments of royalties, IT support service fees,
contributions to our advertising funds, and other fees. In 2009, one franchisee
that operated nine stores filed for bankruptcy and the Significant Franchisee is
delinquent in payments due us.  Our top ten franchisees accounted for
approximately 49% of our total franchise revenue in 2009 and the Significant
Franchisee accounted for approximately 18% of total franchise revenue in 2009.
Bankruptcies by our franchisees could prevent us from terminating their
franchise agreements so that we can offer their territory to other franchisees,
negatively impact our market share and operating results as we may have fewer
stores, and adversely impact our ability to attract new
franchisees.




As of
December 30, 2009, we have executed development agreements that represent
commitments to open 108 restaurants at various dates through 2024. The adverse
economic and liquidity conditions have caused some franchisees to delay the
opening of new restaurants under existing development agreements. As a result of
these conditions, we estimate that as few as 18 of those restaurants could
actually open. Although we have developed criteria to evaluate and screen
prospective franchisees, we cannot be certain that the franchisees we select
will have the business acumen or financial resources necessary to open and
operate successful franchises in their franchise areas, and state franchise laws
may limit our ability to terminate or modify these franchise arrangements.
Moreover, franchisees may not successfully operate restaurants in a manner
consistent with our standards and requirements, or may not hire and train
qualified managers and other restaurant personnel. The failure of franchisees to
open and operate franchises successfully could have a material adverse effect on
us, our reputation, our brands and our ability to attract prospective
franchisees and could materially adversely affect our business, financial
condition, results of operations and cash flows.


12


Franchisees
may not have access to the financial or management resources that they need to
open the restaurants contemplated by their agreements with us, or be able to
find suitable sites on which to develop them. Franchisees may not be able to
negotiate acceptable lease or purchase terms for restaurant sites, obtain the
necessary permits and government approvals or meet construction schedules. Any
of these problems could slow our growth and reduce our franchise revenue.
Additionally, our franchisees typically depend on financing from banks and other
financial institutions, which may not always be available to them, in order to
construct and open new restaurants. 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
who have other restaurant concepts have incurred significant loss of cash flow
due to declining sales in these other concepts and one has filed bankruptcy.
This has had the effect of slowing development of new El Pollo Loco restaurants
and 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. We
expect these trends to continue at least through 2010. Also, we sublease certain
restaurants to some existing California franchisees. If any such franchisees
cannot meet their financial obligations under the sublease, or otherwise fail to
honor or default under the terms of the sublease, we would be financially
obligated under the master lease and could be materially adversely
affected.





Our franchisees
could take actions that could harm our business.




Franchisees
are independent business operators and are not our employees and we do not
exercise control over their day-to-day operations of the restaurants. We provide
training and support to franchisees, and set and monitor operational standards,
but the quality of franchised restaurant operations may be diminished by any
number of factors beyond our control. Consequently, franchisees may not
successfully operate restaurants in a manner consistent with our standards and
requirements, or may not hire and train qualified managers and other restaurant
personnel. If franchisees do not, our image and reputation, and the image and
reputation of other franchisees, may suffer materially and system-wide sales
could decline significantly.




Franchisees,
as independent business operators, may from time to time disagree with us and
our strategies regarding the business or our interpretation of our respective
rights and obligations under the franchise agreement. This may lead to disputes
with our franchisees and we expect such disputes to occur from time to time in
the future as we continue to offer franchises. To the extent we have such
disputes, the attention of our management and our franchisees will be diverted
from our restaurants, which could have a material adverse effect on our
business, financial condition, results of operations or cash flows.





Our
self-insurance programs may expose us to significant and unexpected costs and
losses.





We
currently maintain workers’ compensation, general liability and employee health
insurance coverage on a self-insured basis. We do maintain stop loss coverage
which sets a limit on our liability for both individual and aggregate claim
costs.





We
currently record a liability for our estimated cost of claims incurred and
unpaid as of the balance sheet date. Our estimated liability is recorded on an
undiscounted basis and includes a number of significant assumptions and factors,
including historical trends, expected costs per claim, actuarial assumptions and
current economic conditions. Our history of claims activity for all lines of
coverage is closely monitored and liabilities are adjusted as warranted based on
changing circumstances. It is possible, however, that our actual liabilities may
exceed our estimates of loss. We may also experience an unexpected large number
of claims that result in costs or liabilities in excess of our projections and
therefore we may be required to record additional expenses. For these and other
reasons, our self-insurance reserves could prove to be inadequate, resulting in
liabilities in excess of our available insurance and self-insurance.  If a
successful claim is made against us and it not covered by our insurance or
exceeds our policy limits, our business may be negatively and materially
impacted.





We are vulnerable
to changes in consumer preferences and economic conditions that could harm our
business, financial condition, results of operations and cash flow.




Food
service businesses are often affected by changes in consumer tastes, national,
regional and local economic conditions and demographic trends. Factors such as
traffic patterns, weather, fuel prices, local demographics and the type, number
and location of competing restaurants may adversely affect the performance of
individual locations. In addition, inflation and increased food or energy costs
may harm the restaurant industry in general and our locations in particular.
Adverse changes in any of these factors could reduce consumer traffic or impose
practical limits on pricing that could harm our business, financial condition,
results of operations and cash flow. As discussed above and in Item 1, the
economic downturn has negatively impacted the restaurant industry and our
financial results. There can be no assurance that consumers will continue to
regard chicken-based or Mexican-inspired food favorably or that we will be able
to develop new products that appeal to consumer preferences. Our continued
success depends in part on our ability to anticipate, identify and respond to
changing consumer preferences and economic conditions.


13


We may not be
able to compete successfully with other quick service and fast casual
restaurants.




The food
service industry, and particularly the quick service and fast casual segments,
is intensely competitive. In addition, the greater Los Angeles area, the primary
market in which we compete, consists of what we believe is the most competitive
Mexican-inspired quick service and fast casual market in the country. We expect
competition in this market to continue to be intense because consumer trends are
favoring QSRs that offer healthier menu items made with better quality products
and many QSR restaurants are responding to these trends. Competition in our
industry is primarily based on price, convenience, quality of service, brand
recognition, restaurant location and type and quality of food. If our
company-operated and franchised restaurants cannot compete successfully with
other quick service and fast casual restaurants in new and existing markets, we
could lose customers and our revenue may decline. Our company-operated and
franchised restaurants compete with national and regional quick service and fast
casual restaurant chains for customers, restaurant locations and qualified
management and other restaurant staff. Compared with us, some of our competitors
have substantially greater financial and other resources, have been in business
longer, have greater name recognition and are better established in the markets
where our restaurants are located or are planned to be located.





Our substantial
level of indebtedness could materially and adversely affect our business,
financial condition and results of operations.




We have
substantial debt service obligations. At December 30, 2009, our total debt was
approximately $268.2 million, which represented approximately 70% of our total
capitalization, and we had approximately $6.2 million of available revolving
credit facility borrowings under our existing senior secured credit
facilities.




Our high
level of indebtedness could have significant effects on our business, such
as:




•
            limiting our ability to borrow
      additional amounts to fund working capital, capital expenditures,
      acquisitions, debt service requirements, execution of our growth strategy
      and other purposes;





•
            requiring us to potentially
      dedicate all of our cash flow from operations to pay principal and
      interest on our debt, which was approximately 407% of our operating cash
      flow in fiscal 2009, which would reduce availability of our cash flow to
      fund working capital, capital expenditures, acquisitions, execution of our
      growth strategy and other general corporate
    purposes;





•
            making us more vulnerable to
      adverse changes in general economic, industry and competitive conditions,
      in government regulation and in our business by limiting our ability to
      plan for and react to changing
  conditions;





•
            placing us at a competitive
      disadvantage compared with our competitors that have less debt;
      and





•
            exposing us to risks inherent in
      interest rate fluctuations because some of our borrowings are at variable
      rates of interest, which could result in higher interest expense in the
      event of increases in interest
rates.




In
addition, we may not be able to generate sufficient cash flow from our
operations to repay our indebtedness when it becomes due and to meet our other
cash needs. In May 2011 we will be required to make a mandatory redemption,
which is currently estimated to be approximately $10.6 million on our 2014
Notes. If we are not able to pay our debts as they become due, we will be
required to pursue one or more alternative strategies, such as selling assets,
refinancing or restructuring our indebtedness or selling additional debt or
equity securities. We may not be able to refinance our debt or sell additional
debt or equity securities or our assets on favorable terms, if at all, and if we
must sell our assets, it may negatively affect our ability to generate
revenue.




Our
senior secured credit facilities contain a number of covenants that, among other
things, limit or restrict our ability to dispose of assets, incur additional
indebtedness, incur guarantee obligations, prepay other indebtedness, pay
dividends, create liens, make equity or debt investments, make acquisitions,
engage in mergers, make capital expenditures, engage in certain transactions
with affiliates, enter into sale-leaseback transactions, amend documents
relating to other material indebtedness and other material documents and redeem
or repurchase equity interests. In addition, our senior secured credit
facilities require us to comply with a minimum consolidated cash flow for the
most recently completed trailing twelve consecutive months. Our ability to
borrow under our revolving credit facility depends on our compliance with this
test. Events beyond our control, including changes in general economic and
business conditions, may affect our ability to meet this test. We cannot assure
you that we will meet this test in the future, or that the lenders will waive
any failure to meet this test. See “The failure to meet some of our debt
covenants, and the impact of the current United States liquidity crisis, could
have a material adverse effect on our financial condition”
above.


14


Matters relating
to employment and labor law, including wage and hour class action lawsuits, may
adversely affect our business.




Various
federal and state labor laws govern the relationship with our employees and
affect operating costs. These laws include employee classifications as exempt or
non-exempt, minimum wage requirements, unemployment tax rates, workers’
compensation rates, citizenship requirements and other wage and benefit
requirements for employees classified as non-exempt. Significant additional
government regulations or increases in minimum wages or mandated benefits such
as health insurance could materially affect our business, financial condition,
operating results or cash flow.




We are
also 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
could seek to settle certain of these lawsuits. The on-going expense of these
lawsuits, and any substantial settlement payment or damage award against us,
could adversely affect our business, financial condition, operating results or
cash flows. For 2009, we have not recorded any reserves for any litigation in
our financial statements other than an aggregate of $10.4 million for cases we
have agreed to settle.  See “Item 3. Legal Proceedings.”





If we or our
franchisees face labor shortages or increased labor costs, our growth and
operating results could be adversely affected.




Labor is
a primary component in the cost of operating our company-operated and franchised
restaurants. If we or our franchisees face labor shortages or increased labor
costs because of increased competition for employees, higher employee-turnover
rates or increases in the federal minimum wage or other employee benefits costs
(including costs associated with health insurance coverage or workers’
compensation insurance), our operating expenses could increase and our growth
could be adversely affected.





We have a
substantial number of hourly employees who are paid wage rates at or based on
the applicable federal or state minimum wage and increases in the minimum wage
will increase our labor costs. The state of California (where most of our
restaurants are located) increased the minimum wage from $6.75 per hour to $7.50
per hour effective January 1, 2007 and to $8.00 per hour effective January 1,
2008. The federal minimum wage increased from $5.85 to $6.55 per hour effective
July 24, 2008 and increased to $7.25 per hour effective July 24, 2009. We may be
unable to increase our menu prices in order to pass future increased labor costs
on to our guests, in which case our margins would be negatively
affected.




In
addition, our success depends in part upon our and our franchisees’ ability to
attract, motivate and retain a sufficient number of well-qualified restaurant
operators, management personnel and other employees. Qualified individuals
needed to fill these positions can be in short supply in some geographic areas.
In addition, QSRs have traditionally experienced relatively high employee
turnover rates. Although we have not yet experienced any significant problems in
recruiting or retaining employees, our and our franchisees’ ability to recruit
and retain such individuals may delay the planned openings of new restaurants or
result in higher employee turnover in existing restaurants, which could increase
our and our franchisees’ labor costs and have a material adverse effect on our
business, financial condition, results of operations or cash flows. If we or our
franchisees are unable to recruit and retain sufficiently qualified individuals,
our business and our growth could be adversely affected. Competition for these
employees could require us or our franchisees to pay higher wages, which could
also result in higher labor costs.





We are locked
into long-term and non-cancelable leases and may be unable to renew leases at
the end of their terms.




Many of
our restaurant leases are non-cancelable and typically have initial terms of 20
years and two or three renewal terms of five years that we may exercise at our
option. Even if we close a restaurant, we may remain committed to perform our
obligations under the applicable lease, which could include, among other things,
payment of the base rent for the balance of the lease term. In addition, in
connection with leases for restaurants that we will continue to operate, we may,
at the end of the lease term and any renewal period for a restaurant, be unable
to renew the lease without substantial additional cost, if at all. As a result,
we may close or relocate the restaurant, which could subject us to construction
and other costs and risks. Additionally, the revenue and profit, if any,
generated at a relocated restaurant may not equal the revenue and profit
generated at the existing restaurant. We maintain a reserve for restaurant
closures, but there can be no assurance that this reserve will cover our actual
full exposure from all restaurant closures.


15


We and our
franchisees are subject to extensive government regulations that could result in
claims leading to increased costs and restrict our ability to operate or sell
franchises.




We and
our franchisees are subject to extensive government regulation at the federal,
state and local government levels. These include, but are not limited to,
regulations relating to the preparation and sale of food, zoning and building
codes, franchising, land use and employee, health, sanitation and safety
matters. 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 health insurance costs significantly and
accordingly have a negative impact on us. We and our franchisees are required to
obtain and maintain a wide variety of governmental licenses, permits and
approvals. Difficulty or failure in obtaining them in the future could result in
delaying or canceling the opening of new restaurants. Local authorities may
suspend or deny renewal of our governmental licenses if they determine that our
operations do not meet the standards for initial grant or renewal. This risk
would be even higher if there were a major change in the licensing requirements
affecting our types of restaurants.




We are
also subject to regulation by the Federal Trade Commission and subject to state
and foreign laws that govern the offer, sale, renewal and termination of
franchises and our relationship with our franchisees. The failure to comply with
these laws and regulations in any jurisdiction or to obtain required approvals
could result in a ban or temporary suspension on franchise sales, fines or the
requirement that we make a rescission offer to franchisees, any of which could
affect our development agreements for new restaurants that we expect to open in
the future and thus could materially adversely affect our business and operating
results. Any such failure could also subject us to liability to our
franchisees.





The failure to
enforce and maintain our trademarks and protect our other intellectual property
could materially adversely affect our business, including our ability to
establish and maintain brand awareness.




We have
registered the names El Pollo Loco®, Pollo Bowl® and The Crazy Chicken® and
certain other names used by our restaurants as trademarks or service marks with
the United States Patent and Trademark Office and in approximately 43 foreign
countries. The success of our business strategy depends on our continued ability
to use our existing trademarks and service marks in order to increase brand
awareness and further develop our branded products. If our efforts to protect
our intellectual property are not adequate, or if any third party
misappropriates or infringes on our intellectual property, either in print, on
the Internet or through other media, the value of our brands may be harmed,
which could have a material adverse effect on our business, including the
failure of our brands and branded products to achieve and maintain market
acceptance. There can be no assurance that all of the steps we have taken to
protect our intellectual property in the United States and foreign countries
will be adequate. In addition, the laws of some foreign countries do not protect
intellectual property rights to the same extent as the laws of the United
States.





We
maintain as trade secrets or otherwise confidential certain proprietary
standards, specifications and operating procedures. We may not be able to
prevent the unauthorized disclosure or use of our trade secrets or proprietary
information, despite the existence of confidentiality agreements and other
measures. While we try to ensure that the quality of our brands and branded
products is maintained by all of our franchisees, we cannot be certain that
these franchisees will not take actions that adversely affect the value of our
intellectual property or reputation. If any of our trade secrets or proprietary
information were to be disclosed to or independently developed by a competitor,
our business, financial condition and results of operations could be materially
adversely affected.





Concentration
of risk as we maintain all of our cash at one commercial bank





We currently maintain all of our cash
at one commercial bank and the cash that we maintain above the amounts insured
by the Federal Deposit Insurance Corporation (FDIC) are uninsured and subject to
loss. If the commercial bank goes bankrupt, we would lose any deposits above the
FDIC insurance level. Even if the commercial bank does not go bankrupt but runs
into financial trouble, we could suffer delays and experience trouble in
withdrawing our cash deposits.





If
we are unable to protect our customers’ credit card data, we could be exposed to
data loss, litigation and liability, and our reputation could be significantly
harmed.





In connection with credit card sales,
we transmit confidential credit card information by way of secure private retail
networks. Although we use private networks, third parties may have the
technology or know-how to breach the security of the customer information
transmitted in connection with credit card sales, and our security measures and
those of our technology vendors may not effectively prohibit others from
obtaining improper access to this information. If a person is able to circumvent
these security measures, he or she could destroy or steal valuable information
or disrupt our operations. Any security breach could expose us to risks of data
loss, litigation and liability and could seriously disrupt our operations and
any resulting negative publicity could significantly harm our
reputation.


16


We may become
subject to liabilities arising from environmental laws that could likely
increase our operating expenses and materially and adversely affect our business
and results of operations.




We are
subject to federal, state and local laws, regulations and ordinances
that:




•
            govern activities or operations
      that may have adverse environmental effects, such as discharges to air and
      water, as well as waste handling and disposal practices for solid and
      hazardous wastes; and





•
            impose liability for the costs of
      cleaning up, and damage resulting from, sites of past spills, disposals or
      other releases of hazardous
materials.




In
particular, under applicable environmental laws, we may be responsible for
remediation of environmental conditions and may be subject to associated
liabilities, including liabilities for clean-up costs and personal injury or
property damage, relating to our restaurants and the land on which our
restaurants are located, regardless of whether we lease or own the restaurants
or land in question and regardless of whether such environmental conditions were
created by us or by a prior owner or tenant. If we are found liable for the
costs of remediation of contamination at any of our properties, our operating
expenses would likely increase and our operating results would be materially
adversely affected. See “Item 1. Business - Environmental Matters.”





EPLI
is a holding company with no cash or revenue-generating operations and
accordingly EPLI may not be able to service its debt.





Under the
2014 Notes, EPLI had $29.3M of debt outstanding at December 30, 2009 that
requires semi-annual cash interest payments starting in May 2010, a mandatory
redemption payment currently estimated to be approximately $10.6 million in May
2011, and payment of all outstanding principal and interest in 2014.  As a
holding company, EPLI has no direct operations and substantially no assets other
than ownership of 100% of the stock of EPL. 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 us and currently has restrictions
that limit its ability to make distributions or dividends to us. Furthermore,
EPL is permitted under the terms of its senior secured credit facilities,
subject to certain restrictions, to incur additional indebtedness that could
severely restrict or prohibit its ability to make distributions or loans, or pay
dividends to us. EPL may not have sufficient earnings or resources to pay
dividends or make distributions or loans to enable us to meet our obligations.
In addition, even if such earnings were sufficient, we cannot assure that the
agreements governing the current and future indebtedness of EPL will permit EPL
to provide us with sufficient dividends, distributions or loans, if any, to meet
our obligations. Another potential source of cash may be from its indirect
parent, CAC, although CAC is not legally obligated to make any distributions to
EPLI. If EPLI does not have the cash resources to service its debt, it will be
in default of its debt obligations.





We are controlled
by affiliates of Trimaran, and their interests as equity holders may conflict
with the interests of the Company’s noteholders.




Certain
private equity funds affiliated with Trimaran Capital, LLC (“Trimaran”)
indirectly beneficially own a majority of our equity. The Trimaran affiliates
are able to control the election of a majority of our directors and the
directors of our parent and subsidiary companies, the appointment of new
management and the approval of any action requiring the vote of our outstanding
common stock, including amendments of our certificate of incorporation, mergers
or sales of substantially all our assets. The directors elected by the Trimaran
affiliates are able to make decisions affecting our capital structure, including
decisions to issue additional capital stock and incur additional debt. The
interests of our equity holders may not in all cases be aligned with the
interests of our noteholders. For example, if we encounter financial
difficulties or are unable to pay our debts as they mature, the interest of our
equity holders might conflict with the interests of our noteholders. In
addition, our equity holders may have an interest in pursuing acquisitions,
divestitures, financings or other transactions that, in their judgment, could
enhance their equity investments, even though such transaction might involve
risks to our business and financial condition or to our
noteholders.


17


Item 1B. Unresolved Staff Comments.




Not
applicable.




Item 2. Properties.




Our
restaurants are either free-standing facilities, typically with drive-thru
capability, or attached restaurants. The average free-standing restaurant
provides seating for approximately 60 customers while the average attached
restaurant provides seating for approximately 40 customers. A typical restaurant
generally ranges from 2,200 to 2,600 square feet. For a majority of our
company-operated restaurants, we lease land on which our restaurants are built.
Our leases generally have terms of 20 years, with two or three renewal terms of
five years. Restaurant leases provide for a specified annual rent, and some
leases call for additional or contingent rent based on revenue above specified
levels. Generally, leases are “net leases” that require us to pay a pro rata
share of taxes, insurance and maintenance costs. We own 18 properties, of which
15 are company-operated restaurants and 3 are leased to franchisees. All 18 of
these owned properties are subject to mortgages that secure our existing senior
secured credit facilities. In addition, we lease 157 properties on which we
operate restaurants.




On May
18, 2007, the Company entered into a new corporate office lease. The lease
commenced in October of 2007 and has a term of 10 1⁄2 years at an annual expense
for financial statement purposes of approximately $271,000.




Locations




As of
December 30, 2009, we and our franchisees operated 415 restaurants as
follows:




Designated Market Area
              
              Number of
                Company-
                Operated
                Restaurants
              
              
              Number of
                Franchised
                Restaurants
              
              
              Total
                Number of
                RestaurantsLos
      Angeles, CA
              
              
              132
              
              
              
              138
              
              
              
              270San
      Diego, CA
              
              
              -
              
              
              
              21
              
              
              
              21Phoenix,
      AZ
              
              
              -
              
              
              
              20
              
              
              
              20San
      Francisco/San Jose, CA
              
              
              -
              
              
              
              15
              
              
              
              15Las
      Vegas, NV
              
              
              15
              
              
              
              -
              
              
              
              15Sacramento/Stockton/Modesto,
      CA
              
              
              -
              
              
              
              14
              
              
              
              14Fresno/Merced,
      CA
              
              
              9
              
              
              
              1
              
              
              
              10San
      Antonio, TX
              
              
              6
              
              
              
              -
              
              
              
              6Bakersfield,
      CA
              
              
              -
              
              
              
              5
              
              
              
              5Palm
      Springs, CA
              
              
              4
              
              
              
              1
              
              
              
              5Reno,
      NV
              
              
              -
              
              
              
              4
              
              
              
              4Santa
      Barbara, CA
              
              
              -
              
              
              
              4
              
              
              
              4Atlanta,
      GA
              
              
              4
              
              
              
              -
              
              
              
              4Salinas,
      CA
              
              
              -
              
              
              
              3
              
              
              
              3Chicago,
      IL
              
              
              1
              
              
              
              2
              *
              
              
              3Norfolk,
      VA
              
              
              -
              
              
              
              3
              
              
              
              3Rio
      Grande Valley, TX
              
              
              -
              
              
              
              2
              
              
              
              2El
      Centro, CA
              
              
              -
              
              
              
              2
              
              
              
              2Salt
      Lake City, UT
              
              
              1
              
              
              
              1
              
              
              
              2Portland,
      OR
              
              
              -
              
              
              
              2
              
              
              
              2St.
      Louis, MO
              
              
              -
              
              
              
              1
              
              
              
              1Tucson,
      AZ
              
              
              -
              
              
              
              1
              
              
              
              1Denver,
      CO
              
              
              -
              
              
              
              1
              
              
              
              1Hartford,
      CT
              
              
              -
              
              
              
              1
              
              
              
              1Philadelphia/North
      Bergen, NJ
              
              
              -
              
              
              
              1
              
              
              
              1Total
              
              
              172
              
              
              
              243
              
              
              
              415





* The
company entered into a management agreement and assumed operations of one
franchise-owned store in December 2008. Results of operations of the restaurant
are included in the Company’s financial statements beginning as of the agreement
date.





We use a
combination of in-house development staff and outside real estate consultants to
find, evaluate and negotiate new sites using predetermined site criteria
guidelines. Sites must be qualified based on surrounding population density,
median household income, location, traffic, access, visibility, potential
restaurant size, parking and signage capability. We use in-house demographic
software to assist in our evaluation. We also selectively use outside
consultants who specialize in site evaluation to provide independent validation
of the sales potential of new sites. Our franchisees employ a similar process
using primarily outside consultants.


18


The cost
of opening an El Pollo Loco restaurant varies, depending upon, among other
things, the location of the site and construction required. We generally lease
the land upon which we build our restaurants, operating both free-standing and
attached restaurants. At times, we receive landlord development and/or rent
allowances for leasehold improvements, furniture, fixtures and equipment. The
standard decor and interior design of each of our restaurant concepts can be
readily adapted to accommodate different types of locations.




We
believe that the locations of our restaurants are critical to our long-term
success, and we devote significant time and resources to analyzing each
prospective site. As we have expanded, we have developed specific criteria by
which we evaluate each prospective site. Potential sites generally are in major
metropolitan areas. Our ability to open new restaurants depends upon, among
other things, locating satisfactory sites, negotiating favorable lease terms,
securing appropriate government permits and approvals, recruiting or
transferring additional qualified management personnel and access to financing.
For these and other reasons, we cannot assure you that our expansion plans will
be successfully achieved or that new restaurants will meet with consumer
acceptance or can be operated profitably.




Item 3. Legal Proceedings.





On or
about April 16, 2004, former managers Haroldo Elias, Marco Ramirez and Javier
Rivera filed a purported class action lawsuit in the Superior Court of the State
of California, County of Los Angeles, against EPL on behalf of all putative
class members (former and current general managers and restaurant managers from
April 2000 to present) alleging certain violations of California labor laws,
including alleged improper classification of general managers and restaurant
managers as exempt employees. Plaintiffs’ requested remedies include
compensatory damages for unpaid wages, interest, certain statutory penalties,
disgorgement of alleged profits, punitive damages and attorneys’ fees and costs
as well as certain injunctive relief. The parties reached an agreement to settle
this matter for $8 million which was accrued for in the fourth quarter of 2009.
The Court has granted preliminary approval of the classwide settlement and set a
hearing for final approval on April 1, 2010. We funded the settlement on January
14, 2010.




On or
about October 18, 2005, Salvador Amezcua, on behalf of himself and all others
similarly situated, filed a purported class action complaint against EPL in the
Superior Court of the State of California, County of Los Angeles. Carlos Olvera
replaced Mr. Amezcua as the named class representative on August 16, 2006. This
action alleges certain violations of California labor laws and the California
Business and Professions Code, based on, among other things, failure to pay
overtime compensation, failure to provide meal periods, unlawful deductions from
earnings and unfair competition. Plaintiffs’ requested remedies include
compensatory and punitive damages, injunctive relief, disgorgement of profits
and reasonable attorneys’ fees and costs. This lawsuit was deemed related to and
was included as part of the Elias settlement discussed above.




On June
22, 2006, the Company filed a complaint for declaratory relief, breach of
written contract and bad faith against Arch Specialty Insurance Company
(Arch), seeking damages and equitable relief for Arch’s refusal to carry
out the obligations of its insurance contract to defend and indemnify, among
other things, the Company in the EPL-Mexico v. EPL-USA trademark litigation
settled in June 2008. The parties agreed to settle this matter for a payment by
Arch to the Company of $4.5 million which was recorded as a receivable as of
December 30, 2009 . The basic terms of the agreement were confirmed in late
December 2009 and the settlement payment was received by us on February 2,
2010.




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 $0.9 million and have executed a Memorandum of
Understanding. This amount was accrued for as of December 30, 2009. The Court
granted preliminary approval of the settlement on February 25, 2010, and the
parties currently await a formal court order setting the class notification
deadlines as well as the hearing for final court approval.




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 $1.5
million and have executed a Settlement Agreement. This amount was accrued for as
of December 30, 2009.  The Court granted preliminary approval of the
settlement on February 25, 2010, and the parties currently await a formal court
order setting the class notification deadlines as well as the hearing for final
court approval.


19


On or
about February 2, 2009, Sunset & Westridge, LLC, landlord of a restaurant
site in St. George, Utah, filed suit against EPL in Superior Court for the
County of Orange seeking declaratory relief for alleged breach of a commercial
lease.  Plaintiff alleges that the Company wrongfully terminated the lease
in question, citing force majeure delays as justification for missing the
delivery date on the property.  The parties agreed to settle this matter in
November 2009 for an immaterial amount which was paid in 2009 and the matter was
dismissed on January 15, 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
and will be included in that settlement.





In
September 2008, the excess insurance carrier in the settled Mexico trademark
litigation, American International Specialty Lines Insurance Company, 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 the underlying Mexico trademark litigation. This lawsuit was
stayed pending the outcome of the Arch litigation described above, and is set
for trial starting April 12, 2010.





We are
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. For 2009, we have not recorded
any reserves for any litigation in our financial statements other than an
aggregate of $10.4 million for cases we have agreed to settle.





Item 4. RESERVED





PART II




Item 5. Market for Registrant’s Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities.




Our
common stock is not registered under the Securities Exchange Act of 1934, as
amended. There is no established public trading market for our common stock. On
December 30, 2009, there was one holder of record of our common stock, El Pollo
Loco Holdings, Inc.




In fiscal
year 2008 and 2009, Intermediate paid no cash dividends. The indentures
governing the 2012, 2013 and 2014 Notes contain covenants that, among other
things, limit our ability to pay dividends on our capital stock, subject to
certain exceptions. EPL is also prohibited from paying cash dividends under the
terms of EPL’s senior secured credit facility and other debt obligations, except
in certain circumstances. See Notes 11, 12 and 13 to our Consolidated Financial
Statements.




None of
our equity securities are authorized for issuance under any equity compensation
plan.




Item
6. Selected Financial Data.




The
following table sets forth selected consolidated financial data and is qualified
by reference to and should be read in conjunction with the consolidated
financial statements and the notes thereto and “Item 7. Management’s Discussion
and Analysis of Financial Condition and Results of Operations” included
elsewhere in this Annual Report on Form 10-K. The selected consolidated
financial data is derived from our audited consolidated financial
statements.


20




Predecessor (1)
                      
                      
                      Successor (1)Fiscal Year (2)
                      
                      
                      
                      
                      
                      Fiscal Years (2)December 30,
                        2004 to
                        November 17,
                        2005
                      
                      
                      November 18,
                        2005 to
                        December 28,
                        2005
                      
                      
                      2006
                      
                      
                      2007
                      
                      
                      2008
                      
                      
                      2009Income
      Statement Data:(Amounts
      in thousands)Restaurant
      revenue
                      
                      $
                      197,267
                      
                      
                      $
                      24,527
                      
                      
                      $
                      242,571
                      
                      
                      $
                      259,987
                      
                      
                      $
                      278,343
                      
                      
                      $
                      258,904Franchise
      revenue
                      
                      
                      13,661
                      
                      
                      
                      1,742
                      
                      
                      
                      17,317
                      
                      
                      
                      19,038
                      
                      
                      
                      20,587
                      
                      
                      
                      18,790Total
      operating revenue
                      
                      
                      210,928
                      
                      
                      
                      26,269
                      
                      
                      
                      259,888
                      
                      
                      
                      279,025
                      
                      
                      
                      298,930
                      
                      
                      
                      277,694Product
      cost
                      
                      
                      62,638
                      
                      
                      
                      7,958
                      
                      
                      
                      76,151
                      
                      
                      
                      81,233
                      
                      
                      
                      89,442
                      
                      
                      
                      83,391Payroll
      and benefits
                      
                      
                      50,325
                      
                      
                      
                      6,746
                      
                      
                      
                      61,601
                      
                      
                      
                      67,545
                      
                      
                      
                      73,139
                      
                      
                      
                      68,806Depreciation
      and amortization
                      
                      
                      12,743
                      
                      
                      
                      1,203
                      
                      
                      
                      10,333
                      
                      
                      
                      11,947
                      
                      
                      
                      13,007
                      
                      
                      
                      11,359Other
      operating expenses
                      
                      
                      65,340
                      
                      
                      
                      7,958
                      
                      
                      
                      81,281
                      
                      
                      
                      90,074
                      
                      
                      
                      106,304
                      
                      
                      
                      100,759Goodwill
      and intangible asset Impairment
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      42,093
                      
                      
                      
                      17,430Operating
      income (loss)
                      
                      
                      19,882
                      
                      
                      
                      2,404
                      
                      
                      
                      30,522
                      
                      
                      
                      28,226
                      
                      
                      
                      (25,055
                      )
                      
                      
                      (4,051
                      )Interest
      expense, net
                      
                      
                      38,726
                      
                      
                      
                      3,385
                      
                      
                      
                      28,813
                      
                      
                      
                      29,167
                      
                      
                      
                      26,003
                      
                      
                      
                      32,590Other
      expense
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      2,043
                      
                      
                      
                      443Other
      income
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (1,570
                      )
                      
                      
                      (452
                      )Income
      (loss) before income taxes
                      
                      $
                      (18,844
                      )
                      
                      $
                      (981
                      )
                      
                      $
                      1,709
                      
                      
                      $
                      (941
                      )
                      
                      $
                      (51,531
                      )
                      
                      $
                      (36,632
                      )Net
      income (loss)
                      
                      $
                      (11,193
                      )
                      
                      $
                      (588
                      )
                      
                      $
                      637
                      
                      
                      $
                      (4,034
                      )
                      
                      $
                      (39,481
                      )
                      
                      $
                      (52,257
                      )Supplementary
      Income Statement Data:Restaurant
      other operating expense
                      
                      $
                      38,153
                      
                      
                      $
                      4,623
                      
                      
                      $
                      51,039
                      
                      
                      $
                      56,138
                      
                      
                      $
                      62,861
                      
                      
                      $
                      61,774Franchise
      expense
                      
                      
                      2,794
                      
                      
                      
                      352
                      
                      
                      
                      3,429
                      
                      
                      
                      3,747
                      
                      
                      
                      4,135
                      
                      
                      
                      3,928General
      and administrative expense (3)
                      
                      
                      24,393
                      
                      
                      
                      2,983
                      
                      
                      
                      26,813
                      
                      
                      
                      30,189
                      
                      
                      
                      39,308
                      
                      
                      
                      35,057Total
      other operating expenses
                      
                      $
                      65,340
                      
                      
                      $
                      7,958
                      
                      
                      $
                      81,281
                      
                      
                      $
                      90,074
                      
                      
                      $
                      106,304
                      
                      
                      $
                      100,759Balance
      Sheet Data:Cash
      and cash equivalents
                      
                      $
                      
                      
                      
                      $
                      3,552
                      
                      
                      $
                      2,955
                      
                      
                      $
                      3,841
                      
                      
                      $
                      1,076
                      
                      
                      $
                      11,277Net
      property (4)
                      
                      
                      
                      
                      
                      
                      71,307
                      
                      
                      
                      75,476
                      
                      
                      
                      83,322
                      
                      
                      
                      85,053
                      
                      
                      
                      77,868Total
      assets
                      
                      
                      
                      
                      
                      
                      505,919
                      
                      
                      
                      509,048
                      
                      
                      
                      516,428
                      
                      
                      
                      467,271
                      
                      
                      
                      461,890Total
      debt (5)
                      
                      
                      
                      
                      
                      
                      260,314
                      
                      
                      
                      262,187
                      
                      
                      
                      262,267
                      
                      
                      
                      241,451
                      
                      
                      
                      268,200Total
      stockholders’ equity (deficiency)
                      
                      
                      
                      
                      
                      
                      171,691
                      
                      
                      
                      172,714
                      
                      
                      
                      172,311
                      
                      
                      
                      156,580
                      
                      
                      
                      104,010Other
      Financial Data:Depreciation
      and amortization
                      
                      
                      12,743
                      
                      
                      
                      1,203
                      
                      
                      
                      10,333
                      
                      
                      
                      11,947
                      
                      
                      
                      13,007
                      
                      
                      
                      11,359Capital
      expenditures (6)
                      
                      
                      13,270
                      
                      
                      
                      2,891
                      
                      
                      
                      14,022
                      
                      
                      
                      29,105
                      
                      
                      
                      17,455
                      
                      
                      
                      8,820





(1)
            We refer to ourselves as the
      Predecessor for all periods before Chicken Acquisition Corp. (CAC)
      acquired us on November 17, 2005 (the “Acquisition”) and as the Successor
      for all periods subsequent to the
  Acquisition.





(2)
            We use a 52- or 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.
      Approximately every six or seven years a 53-week fiscal year occurs.
      Fiscal 2008, which ended December 31, 2008, was a 53-week fiscal year.
      Fiscal years 2005, 2006, 2007 and 2009 were 52-week fiscal
      years.





(3)
            General
      and administrative expense includes net litigation settlement expenses of
      $10.942 million and $6.220 million in fiscal years 2008 and 2009,
      respectively.





(4)
            Net property consists of property
      owned and property held under capital
  leases.





(5)
            Total Predecessor debt consists
      of 2009 notes, 2010 notes, notes payable and capital lease obligations.
      Total Successor debt consists of untendered 2009 Notes (for years 2007 and
      2008), the 2012 notes (for 2009), the 2013 notes, the 2014 notes,
      borrowings under the existing senior secured credit facilities, and
      capital lease obligations.





(6)
            Capital
      expenditures consist of cash paid for the purchase of property as well as
      cash paid for the purchase of restaurants from franchisees. The amount
      paid for the purchase of restaurants from franchisees was $1.720 million
      in 2009 and $8.358 million in
2007.


21


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




The following discussion and
analysis of our financial condition and results of operations contains
forward-looking statements. These forward-looking statements are subject to
numerous risks and uncertainties, including, but not limited to, the risks and
uncertainties described in the “Risk Factors” section. Our actual results may
differ materially from those contained in any forward-looking statements. You
should read the following discussion together with the sections entitled “Risk
Factors” and “Selected Financial Data,” and our consolidated financial
statements and related notes thereto included elsewhere in this Annual Report on
Form 10-K.





Overview




We own,
operate and franchise restaurants specializing in marinated, flame-grilled
chicken. Our restaurants are located principally in California, with additional
restaurants in Arizona, Colorado, Connecticut, Georgia, Illinois, Missouri, New
Jersey, Nevada, 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 40 to 60 customers and offering drive-thru
convenience.




Our
restaurant counts at the end of each of the last three fiscal years are as
follows:




El Pollo Loco Restaurants
                  Fiscal-Year End2007
                
                
                2008
                
                
                2009Company-operated
                
                
                157
                
                
                
                165
                
                
                
                172Franchised
                
                
                232
                
                
                
                248
                
                
                
                243System-wide
                
                
                389
                
                
                
                413
                
                
                
                415




During
2009, we opened four new company-operated restaurants and franchisees opened
eight new restaurants. During 2009 we closed one company-operated restaurant and
franchisees closed thirteen restaurants.  The Company entered into a
management agreement and assumed operations of one franchisee-owned store in
December 2008. The Company terminated the management agreement on January 12,
2010 and subsequently, the store closed. The Company also purchased four
restaurants from a franchisee in 2009.




We plan
to open approximately two company-operated restaurants in fiscal 2010. We
believe our franchisees will open approximately three new restaurants in fiscal
2010. The growth in new restaurant openings has been, and is expected to
continue to be, negatively impacted by the economic climate, as discussed below.
In response to the credit crisis, 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 will range from 1,800 to 2,200 square feet, will have
reduced construction costs and a shorter build-out period than our existing
restaurant design.





At the
end of 2009, we had 21 restaurants open in new markets east of the Rockies.
Additionally, six stores were closed in 2009 in these areas due to low sales.
The 21 open stores are 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 the comparable restaurant base for the
calculation of same-store sales the first full week after the 15-month
anniversary of its opening. Fiscal year 2009 same-store sales for restaurants
system-wide decreased 8.2%, compared to increases of 0.2% and 2.7% in 2008 and
2007, respectively. 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
revenues) and contribute to advertising pools based on a percentage of their
sales. Same-store sales at company-operated restaurants decreased 7.7%, and
increased 0.2% and 1.9% for 2009, 2008 and 2007, respectively.


22


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. Due to competitive pressures we did not
implement menu price increases in 2009. The Company did implement price
increases in October 2008, January 2008 and January 2007. The depressed economy
and increased unemployment, especially in California, negatively impacted our
transaction volume and average check in 2009 and 2008. 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 and will make 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. In California, our largest market, at January
2010, unemployment was 12.5% compared to 9.7% nationally.





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, due to adverse economic conditions, several
of our franchisees were delinquent in the payment of franchise fees due us and
one franchisee filed for bankruptcy (we purchased four of its stores and five
other stores were closed). As of December 30, 2009, we had commitments to open
108 restaurants at various dates through 2024. The adverse economic and
liquidity conditions have caused some franchisees to delay the opening of new
restaurants under existing development agreements. As a result of these
conditions, we estimate that as few as 18 of those restaurants could open. 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 who also 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.





We
sublease facilities to certain franchisees and the sublease rent is included in
our franchise revenue. This revenue exceeds rent payments made under the leases
that are included in franchise expense. 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, approximately 14.0% of
revenue from company-owned restaurants in 2009. 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.
On March 1, 2009, new contracts with four chicken suppliers went into effect.
Two of the contracts have a floor and ceiling price for chicken with a term of
two years. The other two contracts were for one year and had fixed pricing for
the term. In March of 2010, two of the four contracts expired with only one of
the two expiring contracts being renewed. The renewed contract is for two years
and has a fixed price for the term of the agreement. The new chicken contract
that we entered into in 2010 has pricing that is relatively flat compared to the
prior year’s expired contract. We implemented price increases in October 2008,
January 2008 and January 2007 that partially mitigated the impact of higher
chicken prices on our profitability. We did not take any price increases in
2009. There is no assurance that we will be able to increase menu prices in the
future to offset these increased costs. Overall commodity prices increased
significantly in 2007 and 2008.




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, which we self
insure. 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. The state of California (our
largest market) increased the minimum wage from $6.75 per hour to $7.50 per hour
effective January 1, 2007 and to $8.00 per hour effective January 1, 2008. The
federal minimum wage increased from $5.85 to $6.55 per hour effective July 24,
2008 and increased to $7.25 per hour effective July 24, 2009. The Company
implemented a menu price increase of approximately 2% at the beginning of 2007
and approximately 2.5% at the beginning of 2008 in order to mitigate the impact
of the minimum wage increase and commodity increases. There were no price
increases in 2009. There is no assurance that we will be able to increase menu
prices in the future to offset 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 began
implementing in 2002. This has resulted in lower workers’ compensation expense
in 2009, 2008 and 2007 compared to previous years.





Depreciation
and amortization expense consists primarily of depreciation of property and
equipment of our restaurants and amortization of our franchise network
intangible asset.


23


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




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 have been impacted by litigation costs, rating agency
fees, directors and officers insurance, compliance with laws relating to
corporate governance and public disclosure, and audit fees. Included in general
and administrative expense are fees paid to affiliates of certain directors
pursuant to a Monitoring and Management Services Agreement. See “Item 11.
Executive Compensation – Compensation Committee Interlocks and Insider
Participation.” Since we expect a difficult economic environment to continue in
2010, we have taken measures to reduce general and administrative expenses by,
among other things, reducing the number of corporate support employees,
deferring raises and promotions, and reducing travel and meeting
costs.




Critical
Accounting Policies and Estimates




The
preparation of financial statements in conformity with U.S. generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities as of the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates under different assumptions or
conditions.




We
believe the following critical accounting policies affect the significant
judgments and estimates used in the preparation of our financial
statements.




Litigation
Reserves





We are
involved in litigation in the ordinary course of our business, such as claims
asserting violations of wage and hour laws in our employment practices. In
preparing our financial statements we account for these contingencies pursuant
to the provisions of ASC 450, “Contingencies”; previously Financial Accounting
Standards Board (“FASB”) Statement No. 5,Accounting for Contingencies
and FASB Interpretation No. 14, Reasonable Estimation of the Amount
of a Loss an interpretation of FASB Statement No. 5, which require that
we accrue for losses that are both probable and reasonably estimable. Because we
believe that these potential losses are not probable or estimable, we have not
recorded any reserves or contingencies related to these legal matters in 2009
other than an aggregate of $10.4 million for cases we have agreed to settle. In
the event that the assumptions we used to evaluate these matters as neither
probable nor estimable change in future periods, we may be required to record a
liability for an adverse outcome, which could have a material adverse effect on
our results of operations and financial position. See “Litigation Contingency”
below.




Recoverability of
Property and Equipment




In
accordance with ASC 360 “Property, Plant and Equipment”; previously FASB
Standard No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets (“FAS 144”),
long-lived assets, such as property and equipment, are reviewed on a
restaurant-by-restaurant basis for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The Company evaluates the carrying value of long-lived assets for
impairment when a restaurant experiences a negative event, including, but not
limited to, a significant downturn in sales, a substantial loss of customers, an
unfavorable change in demographics or a store closure. Upon the occurrence of a
negative event, the Company estimates the future undiscounted cash flows for the
individual restaurants that are affected by the negative event. If an event
occurs or changes in circumstances are present, we estimate the future cash
flows expected to result from the use of the asset and its eventual disposition.
If the sum of the expected future cash flows (undiscounted and without interest
charges) is less than the carrying amount, we recognize an impairment loss. The
most significant assumptions in the analysis are those used to estimate a
restaurant’s future cash flows. The Company generally uses the assumptions in
its strategic plan and modifies them as necessary based on restaurant-specific
information.


24


We
recognized non-cash impairment losses in fiscal 2009 of $4.2 million for five
underperforming Company-operated stores that will continue to operate and
non-cash impairment losses in fiscal 2008 of $1.9 million for three
underperforming Company-operated stores. There were no impairment losses in
fiscal year 2007.These amounts are
included in other operating expenses on our consolidated statement of
operations. The impairment loss recognized is the amount by which the carrying
amount exceeds the fair value. Our assessments of cash flows represent our best
estimate as of the time of the impairment review and are consistent with our
internal planning. If different cash flows had been estimated in the current
period, the property and equipment balances could have been materially impacted.
Factors that we must estimate when performing impairment tests include, among
other items, sales volume, prices, inflation, marketing spending, and capital
spending. With respect to closed restaurants, assets, if any, are reflected at
their estimated net realizable value; liabilities of closed restaurants, which
consist principally of lease obligations, are recognized at their contractual
obligation amount, reduced by estimated future sublease income. We closed one
restaurant at the end of its lease term during 2009 and reserved for the closure
of two additional stores that closed in January 2010. In fiscal 2009, 2008 and
2007, we recorded net closed store reserves of $4,000, $73,000 and $86,000,
respectively.




Goodwill and
other Intangible Assets




Intangible
assets consist primarily of goodwill and the value allocated to our trademarks
and franchise network. Goodwill represents the excess of cost over fair value of
net identified assets acquired in business combinations accounted for under the
purchase method. Goodwill resulted principally from the Acquisition by CAC in
2005 and our acquisition by a previous shareholder in 1999 for the Predecessor
periods.




In
accordance with ASC 350 “Intangibles—Goodwill and Other”, previously SFAS 142,
Goodwill and Other Intangible
Assets (,”FAS 142”), we do not amortize goodwill and certain intangible
assets with an indefinite life, including domestic trademarks. Goodwill is
subject to periodic evaluation for impairment when circumstances warrant, or at
least once per year. Our impairment evaluation for goodwill is conducted
annually coinciding with our fiscal year end. If the estimated fair value is
less than the carrying amount of the other intangible assets with indefinite
lives, then an impairment charge is recorded to reduce the asset to its
estimated fair value. Based on the Company’s analysis described below, in fiscal
2009, we recorded a non-cash full impairment of $6.1 million for our franchise
network and recorded a non-cash impairment of domestic trademarks of $11.3
million.  In fiscal 2008, we recorded a non-cash impairment of goodwill of
$24.5 million and recorded a non-cash impairment of domestic trademarks of $17.6
million. No impairment was recorded in 2007.





The
impairment evaluation for goodwill is conducted annually coinciding with our
fiscal year-end using a two-step process. In the first step, the fair value of
all of our company-owned restaurants, treated as a single reporting unit, is
compared with the carrying amount of the reporting unit, including goodwill. The
estimated fair value of the reporting unit is generally determined on the basis
of discounted future cash flows or in consideration of recent transactions
involving stock sales with independent third parties. If the estimated fair
value of the reporting unit is less than the carrying amount of the reporting
unit, a second step must be completed in order to determine the amount of the
goodwill impairment that should be recorded. In the second step, the implied
fair value of the reporting unit’s goodwill is determined by allocating the
reporting unit’s fair value to all of its assets and liabilities other than
goodwill (including any unrecognized intangible assets) in a manner similar to a
purchase price allocation. The resulting implied fair value of the goodwill that
results from the application of this second step is then compared with the
carrying amount of the goodwill and an impairment charge is recorded for the
difference.





The
assumptions used in the estimate of fair value are generally consistent with the
past performance of our reporting unit and are also consistent with the
projections and assumptions that are used in current operating plans. These
assumptions are subject to change as a result of changing economic and
competitive conditions. Intangible assets with a definite life are amortized
using the straight-line method over their estimated useful lives as
follows:




Franchise
      network
              17.5
      yearsFavorable
      leasehold interest
              1
      to 18 years (remaining lease term)Unfavorable
      leasehold interest
              1
      to 20 years (remaining lease
term)




Accrued
Liabilities




We
self-insure a significant portion of our workers’ compensation and general
liability insurance obligations. Since late 2008 we have also self-insured our
health insurance obligations.  We do maintain stop loss coverage which sets
a limit on our liability for both individual and aggregate claim costs.
 The full extent of certain claims, in many cases, may not become fully
determined for several years. We therefore estimate the potential obligation for
both known claims and for liabilities that have been incurred but not yet
reported based upon historical data and experience and use an outside consulting
firm to assist us in developing these estimates. Although management believes
that the amounts accrued for these obligations are sufficient, any significant
increase in the number of claims or costs associated with claims made under
these plans could have a material adverse effect on our financial
results.


25


Share-Based
Compensation




All
of our options were granted by CAC and represent the right to purchase CAC
common stock. CAC’s only material asset is our stock and CAC has no other
material operations. In December 2004, the FASB issued Statement No. 123 (R),
Share-Based Payment;now known as ASC 718 “Compensation-Stock Compensation”, which requires
companies to expense the estimated fair value of employee stock options and
similar awards based on the grant-date fair value of the award. The cost is
recognized over the period during which an employee is required to provide
service in exchange for the award, usually the vesting period. We adopted the
provisions of ASC 718 on December 29, 2005 for fiscal year 2006 using a
prospective application. Under the prospective application, ASC 718 applies to
new awards and any awards that are modified or cancelled subsequent to the date
of our adoption of ASC 718. Prior periods are not revised for comparative
purposes. As we used the minimum value method for pro forma disclosures under
ASC 718, the 277,608 options outstanding at December 28, 2005, will continue to
be accounted for in accordance with Accounting Principle Board (“APB”) Opinion
No. 25, Accounting for Stock
Issued to Employees, unless such options are modified, repurchased or
cancelled after December 28, 2005.




Of the
197,023 options we granted in 2005, 195,773, or 99.4%, were granted on December
15, 2005, which was 28 days after the Acquisition. The exercise price of these
options to purchase common stock of CAC was equal to the fair market value of
the underlying shares. The fair market value of the underlying shares was
determined by using the price a third-party purchaser, CAC, had paid in an
independent, arm’s-length transaction to acquire all of our outstanding shares
of common stock on November 18, 2005. We did not obtain a contemporaneous
valuation of our common stock by a third party because we believe this
arm’s-length transaction most appropriately reflected the fair market value of
the underlying stock on December 15, 2005. We did not obtain a contemporaneous
valuation by a third party upon grant of the remaining 1,250 options granted
earlier in 2005 due to the nominal size of the grant.




The terms
of the 151,279 options granted on December 15, 2005 (that are outstanding at
December 30, 2009), provided that if an initial public offering of at least
$50,000,000 occurred before November 18, 2007, one-half of the then unvested
options would have become exercisable and the remaining unvested options would
have been exchanged for restricted stock. In the event of a change in control at
any time or an initial public offering after November 18, 2007, the options will
become 100% vested. We accounted for unvested options that would have been
cancelled and replaced with restricted stock upon completion of an initial
public offering before and until November 18, 2007 using variable accounting,
which required us to recognize expense in each reporting period based on the
change in incremental value of the award at each fiscal quarter. As the Company
did not undertake an initial public offering prior to November 18, 2007, the
future compensation expense is calculated based on the fair market value of the
underlying stock as of this date.




For
the year ended December 30, 2009, we recognized compensation expense of $162,000
related to these options. As of December 30, 2009, the total unamortized
compensation expense related to these options was approximately $0.8 million,
which will be amortized over the remaining vesting period of approximately 3.0
years, or earlier in the event of an initial public offering of our common stock
or a change in control.




Beginning
in 2006, pursuant to ASC 718 “Compensation-Stock Compensation”; we began to use
the Black-Scholes option-pricing model to value compensation expense for
share-based awards granted and developed estimates of various inputs, including,
expected term of the option grants, expected volatility of CAC common stock,
comparable risk-free interest rate and expected dividend rate. The forfeiture
rate is based on historical rates of forfeiture and reduces the compensation
expense recognized. The expected term of options granted is derived from the
simplified method per ASC 718-10-30. The comparable risk-free interest rate is
based on the implied yield on a U.S. Treasury constant maturity with a remaining
term equal to the expected term of stock options. Expected volatility is based
on the stock price volatility for public companies in our industry. We do not
anticipate paying any cash dividends in the foreseeable future and therefore we
use an expected dividend rate of zero. Under the prospective method of ASC 718,
compensation expense was recognized during the years ended December 26, 2007,
December 31, 2008 and December 30, 2009 for all stock-based payments granted
after December 28, 2005 based on the grant date fair value estimated in
accordance with the provisions of ASC 718.


26


Results
of Operations




Our
operating results for 2007, 2008 and 2009 are expressed as a percentage of
restaurant revenue below:




Fiscal Years2007
                
                
                2008
                
                
                2009Income
      Statement Data:Restaurant
      revenue
                
                
                100.0
                %
                
                
                100.0
                %
                
                
                100.0
                %Product
      cost
                
                
                31.2
                
                
                
                32.1
                
                
                
                32.2Payroll
      and benefits
                
                
                26.0
                
                
                
                26.3
                
                
                
                26.6Depreciation
      and amortization
                
                
                4.6
                
                
                
                4.7
                
                
                
                4.4Other
      operating expenses
                
                
                34.6
                
                
                
                38.2
                
                
                
                38.9Operating
      income (loss)
                
                
                10.9
                
                
                
                (9.0
                )
                
                
                (1.6
                )Interest
      expense
                
                
                11.2
                
                
                
                9.3
                
                
                
                12.6Loss
      before income taxes
                
                
                (0.4
                )
                
                
                (18.5
                )
                
                
                (14.2
                )Net
      loss
                
                
                (1.6
                )
                
                
                (14.2
                )
                
                
                (20.2
                )Supplementary
      Income Statement Data:Restaurant
      other operating expense
                
                
                21.6
                
                
                
                22.6
                
                
                
                23.9Franchise
      expense
                
                
                1.4
                
                
                
                1.5
                
                
                
                1.5General
      and administrative expense (1)
                
                
                11.6
                
                
                
                14.1
                
                
                
                13.5Total
      other operating expenses
                
                
                34.6
                
                
                
                38.2
                
                
                
                38.9





(1)
            General
      and administrative expenses as a percentage of total operating revenue for
      2007, 2008 and 2009 was 10.8%, 13.1% and 12.6%,
      respectively.





Fiscal
Year Ended December 30, 2009 Compared to Fiscal Year Ended December 31,
2008





Fiscal
year 2009 consisted of 52 weeks, compared to 53 weeks in fiscal year 2008.
Accordingly, the extra week of operations in 2008 was a factor in the 2009
decrease in the dollar amounts of revenue and a majority of our operating
expenses in comparison to the 2008 dollar amounts.




Restaurant
revenue decreased $19.4 million, or 7.0%, to $258.9 million for 2009 from $278.3
million from 2008. The decrease in restaurant revenue was mainly due to the
decrease in comparable store sales of $20.4 million, or 7.7%. 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 was comprised of a check average
decrease of 3.5% and a transaction decrease of 4.2%. The company-operated
same-store sales decrease reflects intense competition and a general sales
softness in the QSR industry due to high unemployment, the recession and other
adverse economic and consumer confidence factors that escalated in 2009 and are
expected to continue at least through 2010. Another major factor contributing to
the decrease in 2009 sales is the $4.5 million in revenue generated in the 53rd
week of fiscal 2008. Additionally, revenue decreased $1.0 million due to EPL
terminating the operating management contract with a franchisee in December 2008
and $0.8 million due to the closures of two company-operated units, one in
2008 and one in 2009. These decreases were partially offset by $3.5
million of revenue from eight new stores opened in fiscal year 2008, $2.8
million of revenue from four units opened in fiscal 2009 and $1.0 million of
revenue from four restaurants purchased from a franchisee in September
2009.




Franchise
revenue decreased $1.8 million, or 8.7%, to $18.8 million for 2009 from $20.6
million for 2008. This decrease is primarily due to decreased development fees
which are attributed to fewer franchised restaurant openings in fiscal 2009 due
to the challenging economic environment and also due to lower royalties and
percentage rent income, which are based on sales, resulting from a 8.6% decrease
in franchise-operated same-store sales for the fiscal 2009 compared to fiscal
2008 along with five and thirteen franchise units that were closed in 2008 and
2009, respectively. This decrease was partially offset by twenty one and eight
new franchise units that opened in 2008 and 2009, respectively.
Franchise-operated same-store sales were impacted by the same adverse factors
that affected company-operated same-store sales described
above.


27


Product
costs decreased $6.0 million, or 6.8%, to $83.4 million for 2009 from $89.4
million for 2008. The major factors in the decrease were the decline in sales
and the 53rd week in
2008. These decreases were partially offset by the additional restaurants open
during fiscal 2009.





Product
costs as a percentage of restaurant revenue was relatively flat for fiscal 2009
at 32.2% compared to fiscal 2008, 32.1%.




Payroll
and benefit expenses decreased $4.3 million, or 5.9%, to $68.8 million for 2009
from $73.1 million for 2008. This decrease is primarily attributed to the lower
worker’s compensation expense in 2009 compared to 2008 of approximately $1.3
million due to programs we put into place in prior periods and the additional
week of salaries of approximately $1.1 million in 2008 since it was a 53-week
year. Additionally, fewer employees were needed to support the lower sales
volume in fiscal 2009 compared to 2008. These decreases were partially offset by
an increase in payroll expenses for restaurants outside of California due to the
increase in the federal minimum wage from $6.55 to $7.25 in July 2009 and by the
additional restaurants opened during fiscal 2009.




As a percentage of restaurant revenue,
payroll and benefit expenses increased 0.3% to 26.6% for 2009 from 26.3% for
2008 mainly due to deleverage caused by lower sales and for the increase in
wages noted above.





Depreciation
and amortization decreased $1.6 million, or 12.8% to $11.4 million for 2009 from
$13.0 million for 2008. This decrease is mainly attributed to a portion of the
point of sale equipment in our restaurants becoming fully depreciated at the end
of 2008. This was partially offset by the four new units we opened and four
units we acquired from a franchisee.





Depreciation
and amortization as a percentage of restaurant revenue decreased slightly to
4.4% for fiscal 2009 compared with 4.7% for 2008.




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
$1.1 million or 1.7%, to $61.8 million for fiscal year 2009 from $62.9 million
for fiscal 2008. The decrease in operating costs was due to a $1.4 million
decrease in utilities mainly due to lower prices of natural gas in 2009, lower
advertising expense of $0.9 million due to lower sales in 2009 and lower
pre-opening expense of $0.4 million due to fewer new store openings. These
decreases were partially offset by $1.1 million increase in occupancy costs due
to new store openings.





Restaurant
other operating expense as a percentage of revenue increased by 1.3% to 23.9%
for 2009 from 22.6% for 2008. The increase in other operating costs as a
percentage of revenue was due in part to the deleverage in revenue as we had a
7.0% decrease in restaurant revenue in 2009 compared to 2008.




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 is to some degree based on
rents that are tied to a percentage of sales calculation. Franchise expense was
$3.9 million for 2009 which is comparable to $4.1 million for 2008.




General
and administrative expenses decreased $4.2 million, or 10.7%, to $35.1 million
for fiscal year 2009 from $39.3 million for fiscal 2008. The decrease in 2009
was due to a reduction of legal expenses of $5.3 million which was mainly due to
a $4.5 million settlement agreement reached in December 2009 relating to the
Arch insurance lawsuit. Salaries and wages decreased $1.4 million due to a
reduction in workforce because of the challenging economy and one less week as
prior year had 53 weeks. Our cost reduction initiatives and fewer store openings
in 2009 compared to 2008 reduced travel and meetings expense by $1.3 million.
These decreases were partially offset by increased impairment charges in fiscal
2009 of $2.2 million, which was due to five under-performing company-operated
stores that will continue to operate. The decreases were also partially offset
by an increase in severance pay of $0.4 million and $0.9 million increase for a
bonus accrual over the prior year. We also recognized a gain on sale of land of
$0.3 million in fiscal 2008 that did not recur in fiscal 2009.





General
and administrative expense as a percentage of total operating revenue was 12.6%
and 13.1% for 2009 and 2008, respectively. This decrease of 0.5% was mainly due
to reasons noted above.





In
accordance with ASC 350 “Intangibles- Goodwill and Other”; previously FASB
Statement No. 142, Goodwill
and Other Intangible Assets, we do not amortize goodwill and certain
intangible assets with an indefinite life, including domestic trademarks. We
perform an impairment test annually at our fiscal year end, or more frequently
if impairment indicators arise. No impairment was recorded in 2007. Due to the
downturn in the economy and its effect on expected future cash flows, we
recorded a non-cash impairment of goodwill of $24.5 million and recorded a
non-cash impairment of domestic trademarks of $17.6 million in 2008. In fiscal
2009, we recorded a non-cash full impairment of $6.1 million for our franchise
network and recorded a non-cash impairment of domestic trademarks of $11.3
million.


28


Interest
expense, net of interest income, increased $6.6 million, or 25.3%, to
 $32.6 million in 2009 from $26.0 million for 2008. Our average debt
balances for 2009 increased to $254.8 million compared to $251.9 million for
2008 and our average interest rate increased to 11.12% compared to 9.81% for
2008. We also had additional amortization expense of approximately $1.2 million
related to deferred financing cost from our May 2009 issuance of senior secured
notes due in 2012.





The
Company had $0.4 million in other expense in the 2009 compared to $2.0 million
in 2008. This decrease was 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 for the life of the agreement.
The Company terminated the interest rate swap agreement in the second quarter of
2009.





The
Company had a $1.1 million decrease in other income compared to 2008. This
decrease was mainly due to a $1.5 million net gain on the repurchase of a
portion of the 2013 and 2014 Notes in 2008 compared to a $0.5 million net gain
on a repurchase of a portion of the 2013 Notes in March 2009.





Despite
having a loss for 2009, our provision for income taxes consisted of income tax
expense of $15.6 million as we recorded a valuation allowance of $30.5 million
against our deferred tax assets in 2009. We had an income tax benefit of $12.1
million for 2008 for an effective tax rate of 23.38% for 2008 and (42.65)% for
2009.





As a
result of the factors noted above, we had a net loss of $52.3 million for 2009
compared to a net loss of $39.5 million for 2008.





Fiscal
Year Ended December 31, 2008 Compared to Fiscal Year Ended December 26,
2007





Fiscal
year 2008 consisted of 53 weeks, compared to 52 weeks in fiscal year 2007.
Accordingly, the extra week of operations was a factor in the 2008 increase in
revenue and a majority of our operating expenses in comparison to the 2007
results of operations.




Restaurant
revenue increased $18.3 million, or 7.1%, to $278.3 million for 2008 from $260.0
million from 2007. The increase in restaurant revenue was mainly due in part to
$6.7 million in current year revenue from fourteen restaurants opened in 2006
and 2007, $6.9 million from ten additional company-operated restaurants in 2008,
$4.5 million in revenue generated in the 53rd week of fiscal 2008, $4.3 million
from three restaurants acquired from a franchisee in 2007 and sales of $1.0
million from a restaurant that was temporarily closed due to a fire in 2007,
partially offset by lost sales of $5.7 million due to the sale of eight company
restaurants to franchisees in 2007 and the closure of three company-operated
restaurants in 2008. This increase was also due to an additional $0.6 million in
restaurant revenue resulting from a 0.2% increase in company-operated same-store
sales for 2008 from 2007. 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 growth
increase were price increases of 2.0%, 1.2%, and 0.5% in January, October, and
various times throughout 2008, respectively, a transaction decrease of 1.9%, and
a menu mix decrease of 1.6%. The transaction decrease reflects intense
competition and a general sales softness in the QSR industry, in part due to
higher gas prices, recession fears, higher unemployment and other economic
factors that occurred 2008 and are expected to continue through at least
2009.




Franchise
revenue increased $1.6 million, or 8.1%, to $20.6 million for 2008 from $19.0
million for 2007. This increase is primarily due to an increase in royalties
resulting from a 0.2% increase in franchise same-store sales and increased store
count and also to an increase of $0.3 million in franchise IT support services
revenue partially due to the increased number of franchise stores supported by
our IT support services. Franchise revenue has been, and will continue to be,
negatively impacted by the economic factors described above.




Product
costs increased $8.2 million, or 10.1%, to $89.4 million for 2008 from $81.2
million for 2007. This increase resulted primarily from more restaurants opened
and increases in commodity costs.





Product
cost as a percentage of restaurant revenue was 32.1% for 2008 compared to 31.2%
for 2007. This 0.9% increase resulted primarily from increases in commodity
cost, partially offset by the menu price increases taken in January and October
2008. We expect continued pressure on commodity costs in 2009. See “Inflation”
below.


29


Payroll
and benefit expenses increased $5.6 million, or 8.3%, to $73.1 million for 2008
from $67.5 million for 2007. This increase is primarily attributed to more
restaurants opened, the additional week of salaries of approximately $1.1
million in 2008 since it was a 53-week year, and the increase in the California
minimum wage effective January 1, 2008. Payroll expenses for restaurants outside
of California were negatively impacted in 2009 due to the increase in the
federal minimum wage from $6.55 to $7.25 in July 2009. See “Inflation”
below.




As a
percentage of restaurant revenue, payroll and benefit expenses increased 0.3% to
26.3% for 2008 from 26.0% for 2007 for the reasons noted above.





Depreciation
and amortization increased $1.1 million, or 8.9% to $13.0 million for 2008
from $11.9 million for 2007. This increase is attributed to depreciation expense
for new company-operated restaurants, capital expenditures on existing
restaurants to comply with the federal Americans with Disabilities Act remodels
and capitalized repairs for existing company restaurants.





Depreciation
and amortization as a percentage of restaurant revenue was basically flat
at 4.7% for 2008 compared to 4.6% for 2007.




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, increased
$6.8 million, or 12.0%, to $62.9 million for 2008 from $56.1 million for 2007.
This increase is mainly attributed to new restaurants and the reasons noted
below.





Restaurant
other operating expense as a percentage of revenue increased by 1.0% to 22.6%
for 2008 from 21.6% for 2007. The increase in operating costs as a percentage of
revenue was due in part to an increase in occupancy costs as a percentage of
revenue, which was primarily due to rent increases at existing stores and higher
rents in new locations, and increased property tax expense due to increased
assessments from tax audits in the current year. The increase in operating costs
was also due to increased utilities expense primarily due to higher natural gas
prices in the current period, an increase in credit card fees as a percentage of
revenue of 0.1% attributed primarily to higher transaction fees, and increased
janitorial expenses as a percentage of revenue of 0.1%.




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 is to some degree based on
rents that are tied to a percentage of sales calculation. Franchise expense
increased $0.4 million, or 10.4%, to $4.1 million for 2008 compared to $3.7
million for 2007. This increase is primarily attributed to increased IT support
services costs for the franchise stores partially due to the increased number of
franchise stores supported by our IT support services; there is a corresponding
increase in franchise income for IT support services revenue.




Included
in general and administrative expense for the 2008 period is a $10.7 million
expense to settle certain trademark litigation. The decrease in general and
administrative expenses was due to a $2.8 million loss recognized in the 2007
period from the sale of eight company restaurants that did not occur in the 2008
period, lower bonus expense of $1.9 million due to not achieving our budget
goals in 2008 and decreased expense for outside services of $0.6 million which
is attributed primarily to decreased spending on Sarbanes-Oxley compliance. The
decrease in expense was partially offset by a non-cash impairment charge in 2008
of $1.9 million, which was recorded by the Company for three under-performing
company-operated stores that will continue to operate and higher salaries and
wages of $1.5 million due to increased headcount and an additional week of
salaries of $0.3 million in 2008.





General
and administrative expense as a percentage of total operating revenue was 13.1%
and 10.8% for 2008 and 2007, respectively. This decrease was attributed to the
reasons noted above.





In
accordance with ASC 350 “Intangibles-Goodwill and Other”; previously FASB
Statement No. 142, Goodwill
and Other Intangible Assets, we do not amortize goodwill and certain
intangible assets with an indefinite life, including domestic trademarks. We
perform an impairment test annually at our fiscal year end, or more frequently
if impairment indicators arise. No impairment was recorded in 2007. Due to the
downturn in the economy and its effect on expected future cash flows, we
recorded a non-cash impairment of goodwill of $24.5 million and recorded a
non-cash impairment of domestic trademarks of $17.6 million in
2008.





Interest
expense, net of interest income, decreased $3.2 million, or 10.9%, to $26.0
million in 2008 from $29.2 million for 2007. Our average debt balances for 2008
decreased to $251.9 million compared to $262.2 million for 2007 and our average
interest rate decreased to 9.81% for 2008 compared to 10.61% for
2007.


30


The
Company had $2.0 million in other expense in the 2008 period related to the
change in the fair value of the interest rate swap agreement. The fixed rate
that the Company agreed to pay under the swap agreement was higher than the
floating rate estimated for the life of the agreement that it will receive,
resulting in the expense.





The
Company had $1.6 million in other income in the 2008 period attributed to a net
gain on the repurchase of a portion of the 2013 and 2014 Notes. This gain is net
of the portion of the deferred finance costs associated with the
notes.




Our
provision for income taxes consisted of an income tax benefit of $12.1 million
in 2008 compared with income tax expense of $3.1 million in 2007 for an
effective tax rate of 23.38% for 2008 and (328.6%) for 2007. The 2008 period’s
effective tax rate was impacted by an adjustment for the non-deductible portion
of goodwill written-off, in the amount of $7.7 million, related to goodwill
impairment. The 2007 period’s effective tax rate was impacted by an adjustment
to recognize an interest deduction related to the EPL Intermediate Discount
Notes in the amount of $0.5 million that we determined not to be subject to
Applicable High Yield Discount Obligation (AHYDO) rules in Section 163(i) of the
Internal Revenue Code. The 2007 period’s effective tax rate was also impacted by
an adjustment for the non-deductible portion of goodwill written-off, in the
amount of $2.8 million, related to the sale of eight company
restaurants.




As a
result of $42.1 million in goodwill and domestic trademark impairment charges,
the $10.7 million settlement expense and the other factors noted above, we had a
net loss of $39.5 million for 2008 compared to a net loss of $4.0 million for
2007.





Liquidity
and Capital Resources





Our
principal liquidity requirements are to service our debt and meet our capital
expenditure needs. At December 30, 2009, our total debt was $268.2 million,
compared to $241.5 million at December 31, 2008. 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
$11.3 million at December 30, 2009 and the approximately $6.2 million that EPL
had available at December 30, 2009 under its credit agreement will be adequate
to meet our liquidity needs for the next 12 months. The current economic crisis
and resulting severely constrained liquidity conditions could make it more
difficult or costly for us to obtain debt or equity financing or to refinance
our existing debt if it becomes necessary, and could make sources of liquidity
unavailable. See “Debt and Other Obligations” below.





On
January 25, 2008, CAC made an $8 million capital contribution to the Company.
The Company used $7.9 million of these proceeds to repurchase a portion of
the outstanding 14.5% senior discount notes due 2014 (see Note 13 to our
Consolidated Financial Statements) at a price that approximated their accreted
value. In May of 2008, CAC made a $4.0 million capital contribution to the
Company that was used for normal operating purposes. In June 2008, CAC paid a
litigation settlement payment of $10.7 million on behalf of EPL. This payment
was accounted for as a capital contribution by CAC to EPL. CAC may make
future capital contributions to the Company and EPL for general corporate
purposes. However, CAC is a separate legal entity and is under no obligation to
make any additional capital contributions to us.




In fiscal
2009, our capital expenditures totaled $8.8 million, consisting of $3.0 million
for new restaurants, $1.7 million for the purchase of the four Atlanta stores
and related assets from Fiesta Brands, Inc., $2.7 million for capitalized
repairs of existing sites, $0.9 million related to other projects and $0.5
million related to remodels. Due to a reduced number of expected new store
openings in 2010 compared to prior years, but increased remodel expenditures
planned for 2010, we expect our capital expenditures for 2010 to be
approximately $ 7.0 to 8.0 million.





Cash and
cash equivalents, including restricted cash, increased $10.3 million from $1.1
million at December 31, 2008 to $11.4 million at December 30, 2009. See “Working
Capital and Cash Flows” below for information explaining this increase. We
cannot assure you 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 facilities in an amount sufficient to enable us to service our
indebtedness or to fund our other liquidity 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.


31


As
discussed in Item 3. “Legal Proceedings,” 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 $8.0 million were made in January 2010. These payments were partially
offset by a $4.5 million settlement payment we received in February
2010.





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
us and currently has restrictions that limit distributions or dividends to be
paid by EPL to us. 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. If we are unable to obtain cash from EPL or other sources, we will
not be able to meet our debt and other obligations. See “Debt and Other
Obligations – 2014 and 2013 Notes” for a description of a mandatory debt
redemption obligation we have in May 2011.





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 investment to build new restaurants, remodel and replace or improve
equipment in company-operated restaurants, and to acquire new restaurant
information systems. We typically do not have significant receivables or
inventories and we receive trade credit based upon negotiated terms in
purchasing food and supplies. Funds available from cash sales and franchise
revenue not needed immediately to pay for food and supplies or to finance
receivables or inventories typically have been used for the capital expenditures
referenced above and/or debt service payments under our existing indebtedness.
We expect our negative working capital balances to continue to increase, based
on the continuation of the economic downturn and our plan to continue to open
new restaurants.





During
the 52 weeks ended December 30, 2009, our cash and cash equivalents, including
restricted cash, increased by $10.3 million to $11.4 million from the period
ended December 31, 2008. This increase was due to the $129.9 million of cash
proceeds received from our 2012 Note offering, $4.0 million from short-term
borrowings under our prior revolver facility and $8.4 million from our operating
activities. These increases were partially offset by the $110.1 million used to
pay off our bank term loan, 2009 Note and revolver, $9.2 million in fees and
costs incurred primarily in connection with the 2012 Note offering, $8.8 million
for capital expenditures, $2.3 million to terminate our interest rate swap
agreement, $0.9 million to repurchase common stock and $0.6 million of capital
lease payments. The $10.4 million decline in purchases of property for the 52
week period 2009 compared to 2008 was mainly due to decreased spending on new
restaurants as we had fewer openings in the current period.





Our
previous credit facility required the prepayment of the related term loan in an
amount equal to 50% of Excess Operating Cash Flow if, at the end of the fiscal
year, the Consolidated Leverage Ratio was less than 5.0:1.0. Excess Operating
Cash Flow is defined as an amount equal to Consolidated EBITDA minus
Consolidated Financial Obligations and other specific payments and adjustments.
Excess Operating Cash Flow for 2008 was $9.4 million. The Company made the
required prepayment of $4.7 million in April 2009.





Debt
and Other Obligations





Credit
Facility




On May
22, 2009, EPL entered into a credit agreement (the "Credit Facility") with
Intermediate as guarantor, the lenders from time to time party thereto,
Jefferies Finance LLC, as lead arranger, book manager, documentation agent,
administrative agent and collateral agent, Jefferies Finance LLC, as syndication
agent, and Jefferies Finance LLC, as issuing bank for the lenders. The Credit
Facility provides for a $12.5 million revolving line of credit with borrowings
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. EPL has $6.3 million of letters of credit outstanding as of
December 30, 2009 (see Note14).





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.


32


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 December 30, 2009, 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 $132,500,000 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 $129,850,000 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 December 30, 2009, we had $130.4
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.





In
connection with the issuance of the 2012 notes, EPL filed a registration
statement on Form S-4 with the SEC in October 2009 and in December 2009, we
completed the exchange of these notes for registered, publicly traded notes that
have substantially identical terms of these notes.





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 balance
sheet, and the related amortization is reflected as a component of interest
expense in the consolidated statement of operations. The Company used the net
proceeds from the 2012 Notes to repay the credit facility with Merrill Lynch,
Bank of America, et al (which provided for a $104.5 million term loan and a
$25.0 million revolving loan) and its 9 1⁄4% Senior Secured Notes due
2009.





As of
December 30, 2009, we calculated our “fixed charge coverage ratio”
(as defined in the indenture governing the 2012 Notes) at 1.31 to 1. The
indenture permits us to incur indebtedness or issue disqualified stock, and the
Company’s restricted subsidiaries to incur indebtedness or issue preferred
stock, if our fixed charge coverage ratio for the most recently ended four full
fiscal quarters would have been at least 2.0 to 1, 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 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 under the terms of the 2012 Notes. A
failure to meet the ratios affects only our ability to incur additional
indebtedness and does not constitute a default under these Notes.





2014
and 2013 Notes





At December 30, 2009, we had $29.3 million outstanding in aggregate
principal amount of 141⁄2% Senior Discount Notes due 2014. 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. On January 25, 2008, CAC made
an $8.0 million capital contribution to the Company. The Company used $7.9
million of these proceeds to repurchase a portion of these notes at a price that
approximated their accreted value. See Note 15 to our Consolidated Financial
Statements. The 2014 Notes are unsecured and are not guaranteed.





If any of
the 2014 Notes are outstanding at May 15, 2011, we are 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 December 30, 2009, it is
estimated that we will be required to pay approximately $10.6 million in May
2011 to satisfy the mandatory redemption requirement. Additionally, we may, at
our discretion, redeem any or all of these notes, subject to certain provisions
contained in the indenture governing these notes.


33


As of
December 30, 2009, we had $106.3 million outstanding in aggregate principal
amount under our 2013 Notes. The Company purchased, at par, the $250,000
remaining balance of the 2009 Notes in May of 2009 with the proceeds of the 2012
Notes. The Company used $13.6 million of proceeds from operations to repurchase
a portion of the 2013 Notes in 2008. See Note12 to our Consolidated Financial
Statements.





As of
December 30, 2009, we calculated our “fixed charge coverage ratio” and our
“consolidated leverage ratio” (as defined in the indenture governing the
2014 Notes) at 1.35 to 1 and 6.57 to 1, respectively. Similar ratios exist in
the indenture governing the 2013 Notes. The indenture permits us to incur
indebtedness that (a) is contractually subordinated to the 2014 Notes, (b) has a
maturity date after November 15, 2014, and (c) does not provide for payment of
cash interest prior to November 15, 2014. The indenture also permits us to incur
indebtedness if our fixed charge coverage ratio for the most recently ended four
full fiscal quarters would have been at least 2.0 to 1, and if our consolidated
leverage ratio would have been equal to or less than 7.5 to 1, all as determined
on a pro forma basis as if such indebtedness had been incurred 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 under the
terms of the 2013 and 2014 Notes. A failure to meet the ratios affects only our
ability to incur additional indebtedness and does not constitute a default under
these Notes.





Other
Obligations





At
December 30, 2009, we had outstanding letters of credit totaling $6.3 million,
which served as collateral for our various workers’ compensation insurance
programs (see Note 14 to our Consolidated Financial Statements).





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 net sales for the Los Angeles designated
market area or 5% of net 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.





Future
Payments Under Debt and Other Obligations




The
following table represents our contractual commitments (which includes expected
interest expense) to make future payments pursuant to our debt and other
obligations disclosed above and pursuant to our restaurant operating leases
outstanding as of December 30, 2009 (amounts in thousands):




2010
                    
                    
                    2011
                    
                    
                    2012
                    
                    
                    2013
                    
                    
                    2014
                    
                    
                    Thereafter
                    
                    
                    Total2012
      Notes
                    
                    $
                    15,482
                    
                    
                    $
                    15,482
                    
                    
                    $
                    147,074
                    
                    
                    $
                    —
                    
                    
                    $
                    —
                    
                    
                    $
                    —
                    
                    
                    $
                    178,0382013
      Notes
                    
                    
                    12,573
                    
                    
                    
                    12,573
                    
                    
                    
                    12,573
                    
                    
                    
                    119,573
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    157,2922014
      Notes
                    
                    
                    4,255
                    
                    
                    
                    14,103
                    
                    
                    
                    2,786
                    
                    
                    
                    2,786
                    
                    
                    
                    22,001
                    
                    
                    
                    —
                    
                    
                    
                    45,931Capital
      leases (see Note 9- to ourconsolidated
      financial statements)
                    
                    
                    627
                    
                    
                    
                    457
                    
                    
                    
                    436
                    
                    
                    
                    417
                    
                    
                    
                    416
                    
                    
                    
                    1,198
                    
                    
                    
                    3,551Purchase
      obligations(2)
                    
                    
                    28,859
                    
                    
                    
                    18,487
                    
                    
                    
                    2,415
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    49,761Subtotal
                    
                    
                    61,796
                    
                    
                    
                    61,102
                    
                    
                    
                    165,284
                    
                    
                    
                    122,776
                    
                    
                    
                    22,417
                    
                    
                    
                    1,198
                    
                    
                    
                    434,573Restaurant
      operating leases (1)
                    
                    
                    17,952
                    
                    
                    
                    16,624
                    
                    
                    
                    15,637
                    
                    
                    
                    13,749
                    
                    
                    
                    11,687
                    
                    
                    
                    83,673
                    
                    
                    
                    159,322Total
                    
                    $
                    79,748
                    
                    
                    $
                    77,726
                    
                    
                    $
                    180,921
                    
                    
                    $
                    136,525
                    
                    
                    $
                    34,104
                    
                    
                    $
                    84,871
                    
                    
                    $
                    593,895




(1)
            Does not reflect the impact of
      renewals of operating leases that are scheduled to expire during the
      periods indicated.




(2)
            In determining purchase
      obligations for this table we used the definition set forth in the SEC
      Final Rule,Disclosure in
      Management’s Discussion and Analysis about Off-Balance Sheet Arrangements
      and Aggregate Contractual Obligations, which states, “a ‘purchase
      obligation’ is defined as an agreement to purchase goods or services that
      is enforceable and legally binding on the registrant and that specifies
      all significant terms, including: fixed minimum quantities to be
      purchased; fixed, minimum or variable/price provisions, and the
      approximate timing of the
transaction.”


34


Litigation
Contingency





As
discussed in Item 3, Legal Proceedings, 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, 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. As of December 30, 2009 we currently have recorded within our financial
statements an aggregate reserve of $10.4 million for cases which we have agreed
to settle.




Recent
Accounting Pronouncements





Recent Accounting
Changes — FASB Accounting Standards Codification


(Accounting
Standards Update (“ASU”) 2009-01)





In
June 2009, the Financial Accounting Standards Board (“FASB”) approved the
FASB Accounting Standards Codification as the single source of authoritative
nongovernmental generally accepted accounting principles (“GAAP”). All existing
accounting standard documents, such as FASB, American Institute of Certified
Public Accountants, Emerging Issues Task Force and other related literature,
excluding guidance from the Securities and Exchange Commission (“SEC”), have
been superseded by the Codification. All other non-grandfathered, non-SEC
accounting literature not included in the Codification has become
nonauthoritative. The Codification did not change GAAP, but instead introduced a
new structure that combines all authoritative standards into a comprehensive,
topically organized online database. The Codification is effective for interim
or annual periods ending after September 15, 2009, and impacts the
Company’s financial statements as all future references to authoritative
accounting literature will be referenced in accordance with the Codification.
There have been no changes to the content of the Company’s financial statements
or disclosures as a result of implementing the Codification during the year
ended December 30, 2009.





As a
result of the Company’s implementation of the Codification during the year ended
December 30, 2009, previous references to new accounting standards and
literature are no longer applicable. In the current year financial statements,
the Company will provide reference to both new and old guidance to assist in
understanding the impacts of recently adopted accounting literature,
particularly for guidance adopted since the beginning of the current fiscal year
but prior to the Codification.





The
following are recent accounting standards adopted or issued that could have an
impact on our Company:





Consolidation
of Variable Interest Entities – Amended


(Included
in Accounting Standards Codification (“ASC”) 810 “Consolidation”; previously
SFAS No. 167 “Amendments to FASB Interpretation No. 46(R)”)





In June
2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation
No. 46(R),” (“SFAS No. 167”) which amends the consolidation guidance that
applies to variable interest entities under FIN 46(R). SFAS No. 167 changes
how a company determines when an entity that is insufficiently capitalized or is
not controlled through voting (or similar rights) should be consolidated. This
statement is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2009. We are currently
evaluating the impact, if any, the adoption of ASC 810 “Consolidation” may have
on our consolidated financial position or results of operations.





In
October 2009, the Financial Accounting Standards Board (“FASB”) issued ASU No.
2009-13, which amends the guidance in ASC 605. ASU 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 surrounding multiple-deliverable arrangements. ASU 2009-13 will be
effective for revenue arrangements entered into for fiscal years beginning on or
after June 15, 2010. We are currently evaluating the impact, if any, the
adoption of ASU 2009-13 may have on our consolidated financial position or
results of operations.


35


In
January 2010, the FASB issued ASU 2010-06, which amends ASC 820 to add new
requirements for disclosures about transfers into and out of Levels 1 and 2 and
separate disclosures about purchases, sales, issuances, and settlements relating
to Level 3 measurements. The ASU also clarifies existing fair value disclosures
about the level of disaggregation and about inputs and valuation techniques used
to measure fair value. The ASU is effective for the first reporting period
(including interim periods) beginning after December 15, 2009, except for the
requirement to provide the Level 3 activity of purchases, sales, issuances, and
settlements on a gross basis, which will be effective for fiscal years beginning
after December 15, 2010, and for interim periods within those fiscal years. We
are currently evaluating the impact, if any, the adoption of ASU 2010-06 may
have on our consolidated financial position or results of
operations.





Inflation




The
impact of inflation on labor, food and occupancy costs in 2007 and 2008 had a
significant effect on our operations. In March 2007, 2008, and 2009 we renewed
certain chicken supply contracts with terms ranging from one to two years at
higher prices than the expiring contracts. The price for the new chicken
contract we entered into in March 2010 with a certain vendor is basically flat
compared to the expired contract. In 2007 and 2008, corn prices, which are a
primary feed source for chicken, increased dramatically. Corn prices have
declined in the last half of 2008 and in early 2009 from its all time highs, but
still remains above historical averages. A major driver of this increase is
demand for corn from the ethanol industry. There have been many new ethanol
plants opening in the United States, and most of these plants use corn as the
primary source of grain to make ethanol. On a historical basis, chicken prices
remain high due to declining egg sets. We have seen other commodity costs,
including paper and plastic, decline from mid-2008 highs.





We
pay many of our employees hourly rates related to the applicable federal or
state minimum wage. The State of California increased the minimum wage from
$6.75 per hour to $7.50 per hour effective January 1, 2007 and to $8.00 per hour
effective January 1, 2008. The federal minimum wage increased from $5.85 to
$6.55 per hour effective July 24, 2008 and increased to $7.25 per hour effective
July 24, 2009. Costs for construction, taxes, repairs, maintenance and insurance
all impact our occupancy costs. Costs of construction and new store rents
increased significantly in 2007 and 2008. We have begun to see an easing in both
these areas due to the recession, but we cannot predict whether this recent
trend will continue.





We
implemented menu price increases in 2007 and 2008 to partially mitigate the
impact of higher chicken prices and labor costs. We attempt to maintain
operating margins through a combination of menu price increases, cost controls,
careful evaluation of property and equipment needs, and efficient purchasing
practices is our most effective tool for dealing with inflation. Due to intense
competition, we did not increase prices in 2009 and there is no assurance we
will be able to implement menu price increases in the future. If inflationary
pressures require aggressive menu price increases in the future to protect our
margins our restaurant traffic could be materially, adversely
affected.





Off-Balance
Sheet and Other Arrangements





As of December 30, 2009 and December
31, 2008, we had approximately $6.2 million and $7.4 million of borrowing
capacity on the revolving portion of our senior credit facility pledged as
collateral to secure outstanding letters of credit.





Item
7A. Quantitative and Qualitative Disclosure 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
revolving credit facility that are payable at floating rates of
interest.




A
hypothetical 10% fluctuation in the variable interest rate on our available
revolver of approximately $6.2 million (no amounts are outstanding under this
revolver) as of December 30, 2009 would result in an increase in interest
expense of approximately $50,000 in a given year. We do not consider the change
in the fair value of our debt resulting from a hypothetical 10% fluctuation in
interest rates as of December 30, 2009 to be material.





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.


36


Item 8. Financial Statements and Supplementary
Data.




The
financial statements, including the Independent Registered Public Accounting
Firm’s Reports thereon, included in this report are listed under Item 15(a). See
Item 15.




Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.




None.




Item 9A(T). Controls and Procedures.




Our Chief
Executive Officer and Chief Financial Officer, Senior Vice President of Finance
have concluded that the design and operation of our disclosure controls and
procedures are effective as of December 30, 2009. 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 our
SEC filings and submissions is accumulated and communicated to management and is
recorded, processed, summarized and reported in a timely manner and in
accordance with SEC rules and regulations.




During
the quarter ended December 30, 2009, management identified a control
weakness related to the preparation of the tax provision that was remediated by
year end.  Our remediation efforts mainly consisted of engaging a new
external resource to provide dedicated expertise in accounting for income taxes
and enhancing our internal review process. Other than the change made to
remediate the aforementioned control weakness, there have been no changes in our
internal control over financial reporting that occurred during the quarter ended
December 30, 2009, that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.




Management’s
Report on Internal Control over Financial Reporting immediately precedes the
Report of Independent Registered Public Accounting Firm. We do not intend for
the Management’s Report to be deemed filed under the Securities Exchange Act of
1934 or incorporated by reference into any filings under such Exchange Act or
the Securities Act of 1933.




Item 9B. Other Information.




On
March 30,
2010, the Company issued a press release reporting results of operations for the
year ended December 30, 2009. A copy of the press release is being furnished as
Exhibit 99 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.





On March
24, 2010, EPL executed a chicken supply contract with Koch Foods, Inc.  The
agreement provides for prices and minimum quantities of chicken that EPL must
purchase from Koch for a period of two years. This information is provided in
this report in response to Item 1.01 of Form 8-K in lieu of filing a Form
8-K.





PART
III




Item 10. Directors, Executive Officers and Corporate
Governance of the Company.




The
following table sets forth certain information regarding our board of directors
and executive officers:




Name
                  
                  Age(1)
                  
                  PositionStephen
      E. Carley
                  
                  57
                  
                  President,
      Chief Executive Officer and DirectorKaren
      B. Eadon
                  
                  56
                  
                  Senior
      Vice President of Marketing and Chief Marketing OfficerJoseph
      N. Stein
                  
                  49
                  
                  Senior
      Vice President of Strategy and InnovationGary
      Campanaro
                  
                  49
                  
                  Senior
      Vice President of Finance, Chief Financial Officer and
      TreasurerJeanne
      A. Scott
                  
                  62
                  
                  Senior
      Vice President of Human Resources and Training and Assistant
      SecretaryJerry
      Lovejoy
                  
                  56
                  
                  Senior
      Vice President, General Counsel and SecretaryStephen
      J. Sather
                  
                  62
                  
                  Senior
      Vice President of OperationsDouglas
      K. Ammerman (2)(3)
                  
                  58
                  
                  DirectorAndrew
      R. Heyer (3)
                  
                  52
                  
                  DirectorDean
      C. Kehler (2)
                  
                  53
                  
                  DirectorJeffrey
      J. Naumowitz(2)
                  
                  33
                  
                  DirectorAlberto
      Robaina
                  
                  45
                  
                  DirectorJohn
      M. Roth (3)
                  
                  51
                  
                  DirectorGriffin
      Whitney
                  
                  34
                  
                  Director





(1)
            As of March 1,
      2010.


(2)
            Member of Audit
      Committee.


(3)
            Member of Compensation
      Committee.


37


Stephen E. Carley has been
the President, Chief Executive Officer and a director of EPL since April 2001.
He has been our President since June 2004 and was elected a director of the
Company in February 2007. Mr. Carley has over 25 years of experience in the
restaurant and food-service industries, including from 1993 to November 1996
when Mr. Carley served in various capacities, including National Vice President
of Development, for Taco Bell Corporation. From November 1996 to October 1998,
Mr. Carley was President of Universal Studios Hollywood Theme Park and Citywalk,
a division of Universal Studios, Inc. From January 1999 to April 2001, Mr.
Carley served as President of OnRadio.com, a website hosting and design
business, Chief Executive Officer of JoePix.com, and President of PhotoPoint
Corporation, two digital-imaging companies. Previously in his career, Mr. Carley
spent 13 years in brand management and operations with General Mills, Inc., the
Pillsbury Company and PepsiCo, Inc.




Karen B. Eadon has been
Senior Vice President of Marketing and Chief Marketing Officer of EPL since
January 2006, previously serving as Vice President and Chief Marketing Officer
from October 2002 to January 2006. She was elected our Senior Vice President of
Marketing in February 2007. From November 2000 to October 2002, Ms. Eadon served
as Vice President, U.S. Marketing for McDonald’s Corporation. From March 1999 to
October 2000, she served as Senior Vice President, Marketing, for Applebee’s
International, Inc. From April 1995 to March 1999, she served as Vice President,
Retail Marketing for Arco Products Company, the refining and marketing division
of ARCO.




Joseph N. Stein was appointed
Senior Vice President of Strategy and Innovation in January 2009. He previously
served as our Senior Vice President of Finance and Chief Financial Officer since
February 2007 and he held those positions at EPL since January 2006. Mr. Stein
served as Vice President of Finance and Chief Financial Officer of EPL from
April 2002 to January 2006 and as our Treasurer and Vice President since 2002
and 2004, respectively. From April 1999 to April 2002, Mr. Stein served as Vice
President and Chief Strategic and Financial Officer for Rubio’s Restaurants,
Inc. From January 1997 to April 1999, he served as Executive Vice President and
Chief Administrative Officer for Checkers Drive-In Restaurants,
Inc.




Gary Campanarowas appointed
Senior Vice President of Finance, Chief Financial Officer and Treasurer of the
Company in January 2009. Mr. Campanaro is a Certified Public Accountant
(inactive) who served as Chief Financial Officer and Secretary of Claim Jumper
Restaurants Holdings Corp. from 2006 until joining the Company. He served as
Chief Financial Officer and Secretary of The Keith Companies, Inc., a civil
engineering firm, from 1998 to 2005, and he held executive positions at CB
Richard Ellis, a real estate company, from 1992 to 1998, and at CKE Restaurants,
Inc. from 1988 to 1992.




Jeanne A. Scott was elected
our Senior Vice President of Human Resources and Training in February 2007 and
has held that position at EPL since January 2006. She served as Vice President
of Human Resources and Training of EPL from February 2003 to January 2006. From
January 1999 to January 2003, Ms. Scott served as Senior Vice President, Human
Resources at Alliance for Sodexho, a worldwide food service management company.
From December 1995 to November 1998, she served as Vice President Human
Resources and Training for Koo Koo Roo, Inc.




Jerry Lovejoy has been the
Senior Vice President and General Counsel for the Company and EPL since July
2007. From November 1999 to May 2003, he served as Division Counsel for
McDonald’s Corporation in San Diego, California and from August 2003 to July
2006, he served as Vice President and General Counsel of Men’s Wearhouse in
Fremont, California.




Stephen J. Sather was elected
our Senior Vice President of Operations in February 2007 and has held that
position at EPL since January 2006. From March 2002 to December 2005, he served
as Senior Vice President Retail Operations for Great Circle Family Foods, LLC
and from December 1996 to December 2001, he served as Chief Operating Officer
for Rubio’s Restaurants, Inc.




Douglas K. Ammerman has been
a director of the Company since September 2006. He held numerous positions with
KPMG, LLP, an international accounting firm, including Managing Partner, from
1973 until his retirement in 2002. Mr. Ammerman holds a Masters in Business
Taxation from the University of Southern California, is a Certified Public
Accountant (inactive) and is a member of the California Society of CPAs. He is a
director and Chairman of the Audit Committee of Fidelity National Financial,
Inc. and Quiksilver, Inc.


38


Andrew R. Heyer has been a
director of the Company since February 2007 and of EPL since November 2005. Mr.
Heyer has been the Chief Executive Officer and a Managing Director of Mistral
Capital Management, LLC, a private equity fund, since 2007. Mr. Heyer was a
Managing Partner of Trimaran Capital, LLC from 2000 until 2007 and he has been a
member of the Investment Committee of Trimaran Advisors, LLC, the investment
advisor to a series of collateralized loan obligation funds, since 1997. From
1995 to 2006, Mr. Heyer served as vice chairman of CIBC World Markets Corp. and
as co-head of the CIBC Argosy Merchant Banking Funds. Prior thereto, Mr. Heyer
was a founder and Managing Director of The Argosy Group L.P. Mr. Heyer currently
serves on the Boards of Directors of Village Voice Media, LLC, Brite Media Group
LLC, Shearers Food, Jamba, Inc., and Chef Solutions. He previously served on the
Boards of Directors of Charlie Brown’s Acquisition Corp. and Hain Celestial
Group, Inc.





Dean C. Kehler was elected a
director of the Company in February 2007 and has served as a director of EPL
since November 2005. He has been a Managing Partner of Trimaran Capital, LLC
since 2000 and a member of the Investment Committee of Trimaran Advisors, LLC
from 1995 to 2006, Mr. Kehler served as vice chairman of CIBC World Markets
Corp. and as co-head of the CIBC Argosy Merchant Banking Funds (Fund I). Prior
thereto, Mr. Kehler was a founder and Managing Director of The Argosy Group L.P.
Mr. Kehler currently serves on the Boards of Directors of Inviva, Inc., Urban
Brands, Inc., Charlie Brown’s Acquisition Corp. and Jefferson National Financial
Corp. He previously served on the Boards of Directors of Booth Creek Ski
Holdings, PrimeCo Wireless Communications LLC, and Source Financing
Corp.





Jeffrey J. Naumowitz has been
a director of the Company since June 4, 2009. Mr. Naumowitz is a Managing
Director of Trimaran Fund Management, LLC. Prior to joining Trimaran in June
2008, Mr. Naumowitz was a Managing Director in the Leveraged Finance Investment
Banking Group of Bear, Stearns & Co., Inc. Prior to joining Bear Stearns in
April 2004, Mr. Naumowitz was a Director in the Leveraged Finance Group of CIBC
World Markets Corp.




Alberto Robaina was elected a
director in December 2007. Since May 2007, Mr. Robaina has been a Managing
Director and General Counsel of TrimaranFund Management, LLC, where he is
responsible for legal and administrative matters for the firm’s private equity
business and for Trimaran Advisors, LLC, the firm’s fixed income management
business. Prior to joining Trimaran, Mr. Robaina spent ten years as General
Counsel and Assistant Secretary for the New York City Investment
Fund.




John M. Roth was elected a
director in December 2007. Mr. Roth joined Freeman Spogli & Co., a private
equity investment firm, in 1988 and became a general partner in 1993. From 1984
to 1988, Mr. Roth was employed by Kidder, Peabody & Co. Incorporated in the
Mergers and Acquisitions Group. Mr. Roth also serves on the board of directors
of hhgregg, Inc., a retailer of video products and appliances. Mr. Roth
previously served on the boards of directors of AFC Enterprises, Inc. and Asbury
Automotive Group, Inc.




Griffin Whitney has been a
director of the Company since September 2006. Mr. Whitney has been a Senior
Associate with Mistral Capital Management LLC, a private equity firm, since
January 2008. He was an Associate at Trimaran Capital, LLC from June 2005
through December 2007. From August 2003 to May 2005, Mr. Whitney attended the
University of Pennsylvania Wharton School Of Business, where he received a
Masters in Business Administration. Prior thereto he was an Associate at AEA
Investors, LLC and an analyst in the mergers and acquisitions group at JP
Morgan/The Beacon Group.





Directors
serve until the next annual meeting of stockholders or until their successors
are elected. Officers serve at the pleasure of the Board of
Directors.





Director
Qualifications to Serve on Our Board





We are indirectly 99% owned by Trimaran
Pollo Partners, LLC (the “LLC”), which itself is owned by various private equity
and investment funds. Pursuant to the LLC’s Operating Agreement, certain members
of the LLC have the right to designate the members of our board of directors and
such designees must be reasonably acceptable to Trimaran Capital, LLC, the
managing member of the LLC. See Item 11. “Executive Compensation – Compensation
Committee Interlocks and Insider Participation.” Pursuant to such Operating
Agreement:





·
            affiliates
      of Freeman Spogli & Co. have the right to designate one member of the
      board (the “FS director”),


·
            the
      chief executive officer of EPL Holdings, Inc., our immediate parent, must
      be a member of our board, and


·
            various
      LLC members affiliated with Trimaran Capital, LLC have the right to
      designate the remaining members of our board (the “Trimaran
      directors”).


39


The LLC members who have the right to
designate directors make their decision based on their own internal policies.
The Trimaran directors are Andrew Heyer, Dean Kehler, Alberto Robaina, Jeffrey
Naumowitz and Griffin Whitney. The FS director is John Roth.





The Operating Agreement requires that
Stephen Carley, our chief executive officer, serve as a director because he is
the chief executive officer of EPL Holdings, Inc. As a board member, our chief
executive officer can provide important information and knowledge about the
Company that the other directors do not possess. Mr. Carley also has extensive
experience in the restaurant and food-service industries in general which
provides the board with valuable industry expertise.





Douglas Ammerman was elected a director
because of his extensive accounting expertise and background (as described
above) and his experience serving on the audit committees of other companies’
boards of directors. Mr. Ammerman serves on our audit committee and is
designated as an “audit committee financial expert” under SEC
rules.




Audit
Committee Financial Expert




Our Board
of Directors has determined that Douglas K. Ammerman qualifies as an “audit
committee financial expert” as defined in the SEC’s rules and that Mr. Ammerman
is independent under the applicable rules of The Nasdaq Stock Market. See “Item
13. Certain Relationships and Related Transactions and Director Independence -
Director Independence.”




EPL
Code of Ethics




EPL has
adopted a Code of Business Ethics & Conduct that applies to all of EPL’s
employees, including our executive officers since they are also employees of
EPL. The Code of Business Ethics & Conduct is filed as an exhibit to this
Annual Report on Form 10-K.





Item
11. Executive Compensation.




Compensation
Discussion and Analysis




Overview
of Compensation Program




The
primary responsibilities of the Compensation Committee (the “Committee”) of our
Board of Directors are: (1) to establish and maintain fair, reasonable and
competitive compensation practices designed to attract and retain key management
employees throughout the Company and to establish appropriate incentives to
motivate and reward key management employees for achieving or exceeding
established corporate performance goals; and (2) to oversee the competency and
qualifications of senior management personnel and the provisions of senior
management succession planning.




The
Company’s compensation policies with respect to its executive officers are based
on the principles that total compensation should, to a significant extent, be
reflective of the financial performance of the Company, and that a significant
portion of executive officers’ compensation should provide long-term incentives.
The Compensation Committee seeks to set and maintain executive compensation at
levels that are sufficiently competitive to attract, retain and motivate high
quality executive talent to maximize the Company’s success. We seek to achieve
this goal through a three-pronged compensation program consisting of base
salaries, annual incentive bonus and stock option grants pursuant to which our
executive officers can potentially earn substantially more compensation than
their base salaries if corporate performance goals are met or surpassed. The
annual incentive bonus is linked to the achievement of the Company’s annual
performance goals and rewards short-term performance. Stock options provide a
long-term incentive for executives to create wealth for our shareholders and
provide rewards based on the appreciation in stock price.




Throughout
this discussion, the individuals who served as the Company’s Chief Executive
Officer and Chief Financial Officer during 2009 and the other individuals
included in the Summary Compensation Table below are referred to as the “Named
Executive Officers.”




Employment
and Related Agreements




The
nature and terms of our executive compensation program have been influenced
significantly by the fact that we are a privately owned company and that
Trimaran Pollo Partners, LLC (the “LLC”), our principal indirect shareholder, is
actively involved in establishing and overseeing our compensation program. Two
of the three members of our Compensation Committee, Andrew Heyer and John Roth,
are representatives of funds which have a majority membership interest in the
LLC.


40


In
connection with the Acquisition by CAC in November 2005, we entered into
employment agreements with our executive officers and CAC entered into other
agreements with the executive officers that established the basic parameters of
our compensation program. These agreements were negotiated with, and approved
by, the LLC. We have also entered into similar agreements with persons who have
become executive officers after the Acquisition. The employment agreements,
which are described below under “Employment Agreements,” provide for the salary,
annual bonus, benefits and payments upon termination of employment described
below. CAC maintains a Stock Option Plan pursuant to which it grants options to
purchase CAC common stock to our executive officers and other senior
management.. All persons who acquire shares or options to purchase shares of CAC
are required to become parties to a Stockholders Agreement with the LLC. The
Stockholders Agreement provides for the put and call rights described below
under “Payments Upon Termination or Change in Control.” This Agreement also
generally imposes restrictions on the ability of the parties to transfer any
shares of CAC stock held by them and contains other provisions governing their
rights as stockholders of CAC. See “Item 13. Certain Relationships and Related
Transactions and Director Independence.”




Compensation
Components




Executive
compensation consists of the following components:




Base
Salary. The Company provides Named Executive Officers with base salary to
compensate them for services rendered during the fiscal year. The base salaries
for our executives set forth in their respective employment agreements were
initially established based on their experience and responsibilities, the
Company’s salary structure and negotiations. Salary adjustments are typically
considered annually as part of the Company’s annual performance review process
as well as upon a promotion or other change in job responsibility. Each year, in
connection with its approval of the annual operating plan, the Board of
Directors considers whether to approve annual merit increase pools for various
categories of Company employees based on a percentage of the aggregate current
salaries of employees in each category. These percentages, which take into
account cost of living factors in Orange County, California, are determined in
conjunction with the preparation of the annual operating plan and are influenced
by other costs and their impact on budgeted EBITDA. For 2009, as part of the
Company’s cost-savings initiatives, there were no merit increases for Support
Center employees, consisting of approximately 127 management and administrative
personnel, including executive officers.




Annual
salary increases for executive officers are approved by the Compensation
Committee based on recommendations from the Chief Executive Officer and his
assessment of the individual’s performance during the prior year. All Company
Support Center employees, including executive officers, are annually evaluated
on the following basis: (i) the employee’s achievement of performance
accountabilities and goals (which vary depending upon the individual employee’s
area of responsibility, e.g., operations, marketing, development, human
resources, finance, etc.) which are set jointly by the employee and his
supervisor in the prior year, and (ii) the employee’s demonstration of
certain “Good to Great” behaviors (based on the principles outlined in Jim
Collins' book Good to
Great ), such as sound decision-making, collaboration and teamwork,
customer orientation, execution and initiative, and integrity and trust. The
employee’s performance accountabilities and Good to Great behaviors are weighted
approximately 50/50 in determining an overall performance rating. We believe
that this balance promotes our policy of tying compensation to both short-term
performance goals and organizational behaviors that build long-term value. The
Compensation Committee reviews the performance of the Chief Executive Officer on
an annual basis using the same performance review documents and principles as
used for the other executive officers.





Based on
the executive’s performance review ratings and other factors, such as relative
position, responsibilities and tenure, the Chief Executive Officer, in
consultation with the Compensation Committee members, recommends specific salary
increases for all executive officers, including himself. Due to the difficult
and challenging economic environment and the Company’s operating results in
2008, there were no salary increases for the Named Executive Officers for
2009.




Annual
Bonus. Executive officers are eligible for annual incentive bonuses
pursuant to the terms of their respective employment agreements based upon our
achievement of budgeted EBITDA as approved by the Board of Directors for each
fiscal year (the “Bonus Plan”). This element of compensation serves to motivate
and challenge the executive to achieve superior short-term performance, while
stock option awards are designed to motivate long-term performance and tenure at
the Company. In addition, prior to 2009, all of our Support Center employees
were eligible for an annual bonus based on the achievement of budgeted EBITDA
and other employees were entitled to bonuses based on the achievement of
specific operating performance goals tailored to their positions and
responsibilities. As part of our cost-savings initiatives, the Company did not
award any bonuses to Support Center employees for 2009 based on the achievement
of budgeted EBITDA, but instead awarded discretionary bonuses as described below
under “Discretionary Bonuses.” The bonus plan based on the achievement of
budgeted EBITDA may be reinstated in future years.


41


The Bonus
Plan provides for a cash bonus, dependent upon the level of achievement of
budgeted EBITDA, calculated as a percentage of the officer’s base salary, with
higher ranked officers compensated at a higher percentage of base salary to
reflect their greater level of responsibility for the implementation and
achievement of the annual plan. The percentages for the Named Executive Officers
reflect our compensation policy that a substantial portion of the compensation
opportunity should depend on the achievement of specific corporate performance
goals. As set forth in their respective employment agreements, the target bonus
awards (as a percentage of base salary) are as follows: Chief Executive Officer,
100%; Chief Financial Officer, 75%; and Senior Vice Presidents, 75%. In
connection with his hiring in January 2009, we agreed to pay Mr. Campanaro a
minimum $60,000 bonus for 2009 as an incentive for him to accept our offer of
employment.




Depending
on the achievement of budgeted EBITDA, the annual bonus for executive officers
ranges from 25% to 150% of the target bonus, and no bonus is paid if actual
adjusted EBITDA for the year is less than 90% of budgeted EBITDA. The bonus
calculation for executive officers is scaled to decline at a significantly
greater rate if actual adjusted EBITDA is less than budgeted EBITDA, compared to
the increase if actual adjusted EBITDA exceeds budgeted EBITDA. For example, if
actual adjusted EBITDA equals 95% of budgeted EBITDA, the bonus is equal to
62.5% of target bonus, whereas if actual adjusted EBITDA equals 110% of budgeted
EBITDA, the bonus equals 120% of target bonus. This scaling is designed to
reward executive officers only if the Company substantially achieves or exceeds
its annual plan for budgeted EBITDA.




Adjusted
EBITDA is defined as the income of the Company before, without duplication,
interest expense, amortization of deferred financing fees and
acquisition-related bank fees, income taxes, depreciation and amortization
expense, gains (or losses) on the sale of company-operated restaurants or other
significant assets, amortization of rent related to the application of ASC 840
“Leases” FAS 13, legal expenses associated with lawsuits relating to FLSA and
California Labor Code exempt classification, transaction and new debt offering
expenses, stock option expenses, and litigation-related legal expenses over
plan, and after all bonuses and profit sharing expenses of the Company of any
kind.





We
believe that adjusted EBITDA is the best measure of our financial performance to
use for the Bonus Plan because we utilize a similar measure to establish our
budgets and to analyze our operations as compared to our budgets. The
adjustments to income that define adjusted EBITDA facilitate our ability to
measure operating performance by eliminating certain items which do not reflect
management’s ability to impact the business and which we believe should not be
taken into account for incentive compensation purposes. EBITDA is also an
important non-GAAP valuation tool that is frequently used by securities
analysts, investors and others to evaluate companies in the multi-unit limited
service restaurant industry.




Each
year, management prepares a five-year development plan and annual operating plan
for the upcoming fiscal year which reflects management’s and the LLC’s
objectives for return on assets, growth and capital spending. These plans are
reviewed and approved by the Board of Directors. Budgeted EBITDA is derived from
the annual operating plan using the definition of adjusted EBITDA above. In each
of the following years, the annual bonus earned by executive officers under
Bonus Plan were the following percentages of target bonus: 2009 – not applicable
(waived), 2008 – 0%, 2007 - 63%, 2006 - 70%, and 2005 – 105%.





As part
of the cost-savings initiatives that the Company implemented in 2009 in response
to the adverse effects of the recession on our operating results, the
Compensation Committee decided to implement the discretionary bonus described
below and requested all officers with employment agreements, and such persons
agreed, to waive their right to receive bonuses under the Bonus Plan for fiscal
year 2009.





Discretionary
Bonuses. In addition to the Bonus Plan provided for in their employment
agreements, the Compensation Committee may also, from time to time, decide to
award discretionary bonuses to executives upon the occurrence of extraordinary
events, such as a significant financing, acquisition or sale.  For 2009,
the Compensation Committee established a $1 million discretionary bonus pool for
all Support Center employees, including executive officers, to replace the Bonus
Plan and a similar plan for other Support Center employees. The Committee
decided to implement the discretionary bonus pool to reward the efforts of
Support Center employees during the current adverse economic environment, but at
a total cost that would be less than would have been paid pursuant to the Bonus
Plan and the previous budgeted EBITDA approach. The Committee delegated to Mr.
Carley, Chief Executive Officer, the discretion to decide how much of the bonus
pool to use and how to allocate the bonus pool among the Support Center
employees, including himself and other executive officers. Mr. Carley
recommended to the Committee that the full bonus pool be awarded after taking
into consideration the following factors: the Company’s 2009 operating results
in the challenging economic environment; the successful $132.5 million bond
sale; the extra workload placed on employees due to staff reductions; and the
fact that the employees had not received merit salary increases in 2009. In
determining the individual bonus amounts he recommended to the Committee for
executive officers, including himself, Mr. Carley allocated amounts to executive
officers on the same basis that the executives would have received a bonus under
the Bonus Plan, reduced on a pro rata basis to reflect the lower amount of the
discretionary bonus pool compared to the amount that would have been available
under the Bonus Plan. He did not make discretionary adjustments based on
individual performance variables. The amount allocated to Mr. Campanaro excluded
the $60,000 minimum guaranteed bonus for 2009 provided in his employment
agreement.  Based on Mr. Carley’s recommendations, the Committee approved
the discretionary bonuses for the Named Executive Officers set forth in the
“Bonus” column of the Summary Compensation Table.


42


Long-Term Stock
Option Incentive Program. We believe that long-term performance is
achieved through an ownership culture that encourages long-term performance by
our executive officers through the use of option-based awards. Stock option
awards enable the Company to enhance the link between the creation of
shareholder value and long-term executive incentive compensation and maintain
competitive levels of total compensation.




Our
historical practice has been for CAC to grant non-qualified stock options to
purchase CAC common stock to an eligible employee either upon hire or upon
promotion to a minimum management level in the Company. Newly hired or promoted
director-level or above employees typically receive their award at the first
scheduled board meeting following their hire or promotion date. Mr. Campanaro,
who joined the Company as Chief Financial Officer in January 2009, was granted
an option for 11,123 shares at an exercise price of $68.00 in September 2009
after the execution of his employment agreement. We do not have a program for
the periodic grant of stock options to our employees. Option awards are
determined by the Compensation Committee in its discretion, taking into account
the number of options previously granted to other officers. Stock options are
granted with an exercise price equal to the fair value of CAC
stock.





Our stock
options are both “performance-based” and “time-based” awards. For the first five
years after the grant of an option, options vest 20% per year upon the
achievement of annual or cumulative budgeted EBITDA goals to motivate management
to achieve our financial goals. Because budgeted EBITDA was not achieved in
2009, none of the options vested in 2009. However, even if the financial goals
are not achieved, options vest 100% after six to seven years to encourage and
reward loyalty and long-term commitment to the Company. We also provide for
accelerated vesting upon an initial public offering of at least $50 million or a
change in control of CAC because these events result in the creation of
shareholder value and we want to motivate our officers to achieve these goals by
permitting them to participate in the increased shareholder value which
results.




Other
Compensation. The Company provides its executive officers with
perquisites and other personal benefits that the Company and the Compensation
Committee believe are reasonable and consistent with its overall compensation
program to better enable the Company to attract and retain superior employees
for key positions. The Named Executive Officers are provided automobile expense
allowances, auto fuel and maintenance costs, supplemental ExecuCare health
insurance and payment of other health insurance premiums. Due to the significant
amount of travel by our Chief Executive Officer to visit restaurants throughout
the country, Mr. Carley is entitled to the use of a leased automobile and he
receives an annual travel stipend of up to $10,000 for personal expenses
incurred by Mr. Carley and his spouse. We intend to continue to maintain these
modest executive benefits and perquisites for officers; however, subject to the
terms of employment agreements, the Compensation Committee in its discretion may
revise, amend or add to the officers’ executive benefits and perquisites if it
deems it advisable.




We
maintain a 401(k) Plan for our employees, including our Named Executive
Officers, because we wish to encourage our employees to save some percentage of
their cash compensation, through voluntary deferrals, for their eventual
retirement. The 401(k) Plan permits employees to contribute up to 25% of their
qualified compensation and we match 100% of the first 3% of the employees’
contribution and 50% of the next 2% of their contribution. The Company’s
matching contribution immediately vests 100%.




Payments
Upon Termination or Change in Control




Pursuant
to the terms of their employment and other agreements (the terms of which were
established in connection with the Acquisition by CAC in 2005), the Named
Executive Officers are entitled to payments in the event of a termination of
employment under certain circumstances or a change in control of CAC. See
“Employment and Related Agreements” above. The types of payments and estimated
amounts payable are described in the table below under “Potential Payments upon
Termination or Change in Control.” In 2009, our former senior vice president,
Brian Berkhausen, left his employment with the Company. Pursuant to his
employment agreement he received one year of salary and pursuant to the terms of
the Stockholders Agreement described below, he was paid the spread between the
exercise price ($2.98) and the fair value of CAC common stock ($70.05) with
respect to stock options held by Mr. Berkhausen covering 8,977 shares that were
cancelled.





We do not
view the change in control or post termination payments as additional elements
of compensation because they are not directly related to the services provided
by the executive and because a change in control or other triggering event may
never occur. We believe the use and structure of our change in control and post
termination payments are consistent with our compensation objectives to attract,
motivate and retain highly talented executives. In addition, we believe the
change in control arrangements preserve morale and productivity, provide a
long-term commitment to job stability and financial security, and encourage
retention in the face of the potential disruptive impact of an actual or
potential change in control of the Company. Our change in control policies
ensure that the interest of our executives will be materially consistent with
the interest of our stockholders when considering corporate
transactions.


43


Pursuant
to their employment agreements, we provide severance payments to our executive
officers only if their employment is terminated by the Company without cause or
by the officer for good reason. The aggregate amount of an executive’s severance
is subject to reduction by the amounts of any other cash severance or
termination benefits payable to him under any other plans, programs or
arrangements of the Company or its affiliates. There are currently no other
formal severance or termination benefits plans or arrangements in place.
Executive officers other than the Chief Executive Officer receive continued
salary for twelve months and a pro rata portion of their bonus. The severance
benefits reflect the fact that it may be difficult for executive officers to
find comparable employment within a short period of time. In addition, except in
the case of severance payments to our Chief Executive Officer, the Company
receives a benefit from the payments since they are linked to the officer’s
compliance with the non-competition, non-solicitation and confidentiality
covenants contained in their employment agreements. Stephen Carley’s employment
agreement provides for a lump sum severance payment equal to two times his base
salary on the date of termination and two times the average of his annual bonus
in the two completed fiscal years prior to the date of termination. The
difference in Mr. Carley’s severance package and method of payment compared to
the other executives is due to his previous executive experience and his
negotiations with the LLC.




In
the event of the death or disability of an executive, to acknowledge such
person’s contribution to the Company’s performance, the executive is entitled to
a pro rata bonus based on the timing of such event during the year.




The
Stockholders Agreement provides that in the event of a termination without cause
or for good reason, a Named Executive Officer has the right (“put right”) to
require CAC to purchase all of his shares of CAC stock (including shares
underlying vested options) at their fair market value as determined by the board
of CAC. Upon the officer’s termination for any reason, CAC has the right (“call
right”) to purchase all of the officer’s CAC stock (including shares underlying
vested options) at (i) the lower of cost or fair market value if termination is
for cause or without good reason, or (ii) fair market value if termination is
for any other reason. CAC and the Company are privately owned and there is no
public market for CAC stock. The principal purpose of CAC’s call right is to
enable it to keep CAC shares closely held and out of the hands of former
employees who may become employed by competitors that have interests adverse to
the Company. The ability to repurchase these shares also enables CAC to issue
shares or options to new management personnel without further dilution to its
stockholders. Because there is no public market for the CAC stock, the officers’
put right enables the officers to liquidate their interest in CAC when they
leave the Company and to realize on any gains resulting from an appreciation in
the value of CAC shares during their tenure as officers.




The CAC
stock option agreements provide for automatic vesting of options upon the
occurrence of a change in control of CAC. If the options are not exercised, they
will automatically terminate on the effectiveness of the change in control
unless the surviving or acquiring company agrees to assume the options or to
substitute new options. We believe that the interests of our stockholders are
best served if the interests of our senior management are aligned with them, and
providing for acceleration of options in the event of a change in control should
eliminate, or at least reduce, the reluctance of senior management to pursue
potential change in control transactions that may be in the best interests of
our stockholders.




Tax
and Accounting Implications




Under Section 162(m) of the Internal
Revenue Code (the “Code”), a public company may not deduct compensation of more
than $1,000,000 that is paid to certain individuals. Sections 280G and 4999 of
the Code limit the ability of certain companies to take a tax deduction for
“excess parachute payments” (as defined therein) and impose excise taxes on each
executive that receives “excess parachute payments” in connection with his or
her severance in connection with a change in control. These provisions of the
Code are not applicable to the Company because our equity securities are not
publicly traded. When we become subject to these provisions, the Compensation
Committee will consider the impact of these provisions on our compensation
structure.




Various rules under generally accepted
accounting practices determine the manner in which the Company accounts for
grants of equity-based compensation to our employees in our financial
statements. Beginning on December 29, 2005, the Company began accounting for
stock-based payments, such as stock option awards, in accordance with the
requirements of ASC 718 “Compensation-Stock Compensation”; previously SFAS
123(R) as discussed in “Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations - Critical Accounting Policies -
Share-Based Compensation.”


44


Compensation
Committee Report
  The Compensation Committee of the Board
of Directors oversees our compensation program on behalf of the Board. In
fulfilling its oversight responsibilities, the Compensation Committee reviewed
and discussed with management the Compensation Discussion and Analysis set forth
in this Form 10-K. Based upon the review and discussions referred to above, the
Compensation Committee recommended to the Board that the Compensation Discussion
and Analysis be included in this Form 10-K.


Compensation
      Committee:Douglas
      AmmermanJohn
      M. RothAndrew
      R. Heyer





Summary
Compensation Table




The
following table provides compensation information for years 2007, 2008 and 2009
with respect to our principal executive officer, each person who served as our
principal financial officer during 2009, our three other most highly compensated
executive officers, and a former executive officer who would have been one of
the three other most highly compensated executive officers had he been an
executive officer at December 30, 2009 (the “Named Executive
Officers”).





Non-EquityName and Principal
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                Option
                                                
                                                
                                                Incentive
      Plan
                                                
                                                
                                                All
      OtherPosition
                                                Year
                                                
                                                Salary
                                                
                                                
                                                Bonus
                                                
                                                
                                                Awards
                                                
                                                
                                                Compensation
                                                
                                                
                                                Compensation
                                                
                                                
                                                Total($)
                                                
                                                
                                                ($)
                                                
                                                
                                                ($)
                                                
                                                
                                                ($)
                                                
                                                
                                                ($)
                                                
                                                
                                                ($)(a)
                                                
                                                
                                                (b)
                                                
                                                
                                                (c)
                                                
                                                
                                                (d)
                                                
                                                
                                                (e)Stephen
      E. Carley,
                                                2009
                                                
                                                
                                                456,731
                                                
                                                
                                                
                                                168,806
                                                
                                                
                                                
                                                0
                                                
                                                
                                                
                                                0
                                                
                                                
                                                
                                                64,235
                                                
                                                
                                                
                                                689,772President
      and Chief
                                                2008
                                                
                                                
                                                446,707
                                                
                                                
                                                
                                                0
                                                
                                                
                                                
                                                0
                                                
                                                
                                                
                                                0
                                                
                                                
                                                
                                                68,141
                                                
                                                
                                                
                                                514,848Executive
      Officer
                                                2007
                                                
                                                
                                                367,009
                                                
                                                
                                                
                                                0
                                                
                                                
                                                
                                                0
                                                
                                                
                                                
                                                234,281
                                                
                                                
                                                
                                                57,600
                                                
                                                
                                                
                                                658,890Gary
      Campanaro,
                                                2009
                                                
                                                
                                                234,606
                                                
                                                
                                                
                                                78,967
                                                
                                                
                                                
                                                309,417
                                                
                                                
                                                
                                                0
                                                
                                                
                                                
                                                29,612
                                                
                                                
                                                
                                                652,602Senior
      Vice PresidentFinance
      and ChiefFinancial
      Officer (f)Joseph
      N. Stein,
                                                2009
                                                
                                                
                                                256,750
                                                
                                                
                                                
                                                69,775
                                                
                                                
                                                
                                                0
                                                
                                                
                                                
                                                0
                                                
                                                
                                                
                                                33,415
                                                
                                                
                                                
                                                359,940Senior
      Vice President,
                                                2008
                                                
                                                
                                                259,073
                                                
                                                
                                                
                                                0
                                                
                                                
                                                
                                                0
                                                
                                                
                                                
                                                0
                                                
                                                
                                                
                                                29,237
                                                
                                                
                                                
                                                288,310Strategy
      and Innovation(f)
                                                2007
                                                
                                                
                                                249,109
                                                
                                                
                                                
                                                0
                                                
                                                
                                                
                                                0
                                                
                                                
                                                
                                                119,567
                                                
                                                
                                                
                                                27,438
                                                
                                                
                                                
                                                396,114Karen
      B. Eadon,
                                                2009
                                                
                                                
                                                264,345
                                                
                                                
                                                
                                                71,839
                                                
                                                
                                                
                                                0
                                                
                                                
                                                
                                                0
                                                
                                                
                                                
                                                38,462
                                                
                                                
                                                
                                                374,646Senior
      Vice President,
                                                2008
                                                
                                                
                                                268,105
                                                
                                                
                                                
                                                0
                                                
                                                
                                                
                                                0
                                                
                                                
                                                
                                                0
                                                
                                                
                                                
                                                44,692
                                                
                                                
                                                
                                                312,797Marketing
                                                2007
                                                
                                                
                                                262,171
                                                
                                                
                                                
                                                0
                                                
                                                
                                                
                                                0
                                                
                                                
                                                
                                                125,518
                                                
                                                
                                                
                                                30,390
                                                
                                                
                                                
                                                418,079Stephen
      J. Sather,
                                                2009
                                                
                                                
                                                236,385
                                                
                                                
                                                
                                                64,241
                                                
                                                
                                                
                                                0
                                                
                                                
                                                
                                                0
                                                
                                                
                                                
                                                32,628
                                                
                                                
                                                
                                                333,254Senior
      Vice President,
                                                2008
                                                
                                                
                                                238,524
                                                
                                                
                                                
                                                0
                                                
                                                
                                                
                                                0
                                                
                                                
                                                
                                                0
                                                
                                                
                                                
                                                33,906
                                                
                                                
                                                
                                                272,430Operations
                                                2007
                                                
                                                229,933
                                                
                                                
                                                
                                                0
                                                
                                                
                                                
                                                0
                                                
                                                
                                                
                                                110,083
                                                
                                                
                                                
                                                34,298
                                                
                                                
                                                
                                                374,314Jeanne
      Scott,
                                                2009
                                                
                                                
                                                227,380
                                                
                                                
                                                
                                                61,793
                                                
                                                
                                                
                                                0
                                                
                                                
                                                
                                                0
                                                
                                                
                                                
                                                39,231
                                                
                                                
                                                
                                                328,404Senior
      Vice President,
                                                2008
                                                
                                                
                                                227,380
                                                
                                                
                                                
                                                0
                                                
                                                
                                                
                                                0
                                                
                                                
                                                
                                                0
                                                
                                                
                                                
                                                33,181
                                                
                                                
                                                
                                                260,561Human
      Resources
                                                2007
                                                
                                                
                                                221,174
                                                
                                                
                                                
                                                0
                                                
                                                
                                                
                                                0
                                                
                                                
                                                
                                                105,890
                                                
                                                
                                                
                                                30,607
                                                
                                                
                                                
                                                357,671Brian
      Berkhausen,
                                                2009
                                                
                                                
                                                47,251
                                                
                                                
                                                
                                                0
                                                
                                                
                                                
                                                0
                                                
                                                
                                                
                                                0
                                                
                                                
                                                
                                                867,150
                                                
                                                
                                                
                                                914,401Former
      Senior Vice
                                                2008
                                                
                                                
                                                246,308
                                                
                                                
                                                
                                                0
                                                
                                                
                                                
                                                0
                                                
                                                
                                                
                                                0
                                                
                                                
                                                
                                                37,229
                                                
                                                
                                                
                                                283,537President
      (g)
                                                2007
                                                
                                                
                                                241,478
                                                
                                                
                                                
                                                0
                                                
                                                
                                                
                                                0
                                                
                                                
                                                
                                                115,313
                                                
                                                
                                                
                                                29,477
                                                
                                                
                                                
                                                386,268





(a)
            These
      amounts represent discretionary bonuses paid in lieu of bonuses payable
      under the Named Officers’ employment agreements (see note (c)) which were
      waived for 2009, including, for Mr. Campanaro, a minimum guaranteed
      $60,000 bonus for 2009 pursuant to his employment
    agreement.


45


(b)
            These
      options represent the right to purchase common stock of CAC. The amounts
      in this column represent the aggregate grant date fair value of the
      options granted during the applicable year computed in accordance with the
      SEC’s rules. These amounts do not correspond to the actual amounts that
      may be recognized upon exercise of the options. The assumptions used
      in these calculations (excluding the forfeiture rate) are described in
      “Item 7. Management’s Discussion and Analysis of Financial Condition
      and Results of Operations - Critical Accounting Policies -Share-Based
      Compensation” and Note 20 to our Consolidated Financial Statements.
      During 2009, options to purchase a total of 20,001 shares were
      forfeited.




(c)
            These amounts represent
      performance bonuses earned pursuant to the terms of the Named Officers’
      employment agreements.  The executive officers waived their right to
      receive bonuses under their employment agreements for 2009. For a
      description of the terms of the bonuses, see “Compensation Discussion
      and Analysis.”




(d)
            For 2009, these amounts represent
      (i) premiums for medical, dental, vision and long-term care insurance
      paid by the Company that exceed the level of premiums the Company
      pays for its other employees; (ii) reimbursements under a supplemental
      health insurance plan; (iii) Company contributions to its 401(k)
      Plan ($14,490 for Mr. Carley and $10,270 for Mr. Stein); (iv) auto
      allowance and auto lease payments; (v) auto fuel and maintenance costs;
      and (vi) personal expenses in connection with business travel. We
      have stated the full cost of these perquisites to the Company since we do
      not obtain the information necessary to calculate the percentage of
      these costs that represents a personal benefit to each
      individual.





(e)
            Excluding
      Mr. Berkhausen, the aggregate of salary and bonus for each Named Executive
      Officer represented at least 90% of his or her respective total
      compensation in 2009.





(f)
            Mr.
      Stein served as Chief Financial Officer until January 19, 2009, when Mr.
      Campanaro assumed that office and Mr. Stein became Senior Vice President
      of Strategy and Innovation.





(g)
            Mr.
      Berkhausen terminated his employment in February 2009. In the column “All
      Other Compensation,” the amount includes $247,615 of severance and
      $602,087 paid in connection with the cancellation of certain vested stock
      options (the difference between the exercise price and fair value of the
      option shares). See “Potential Payments Upon Termination or Change in
      Control.”





Grants
of Plan-Based Awards in Fiscal 2009





This
table sets forth information about a stock option granted to Mr. Campanaro in
2009.





Grants
of Plan-Based Awards





Name
                      
                      Grant
                        Date
                      
                      
                      Approval
                        Date
                      
                      
                      Estimated Future
                        Payouts Under Equity
                        Incentive Plan Awards
                        Target
                        (#)
                      
                      
                      Exercise or Base Price of
                        Option Awards
                        ($/Sh)
                      
                      
                      Grant Date Fair
                        Value of Stock and
                        Option Awards
                        ($)Stephen
      E. Carley
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Gary
      Campanaro
                      
                      9/13/09
                      
                      
                      6/4/09
                      
                      
                      
                      11,123
                      
                      
                      
                      $68.00(1)
                      
                      
                      
                      $309,417Joseph
      N. Stein
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Karen
      B. Eadon
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Stephen
      J. Sather
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Jeanne
      Scott
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Brian
      Berkhausen
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -





(1)
            This
      stock option grant was made pursuant to the CAC 2005 Stock Option Plan
      which is described below under “CAC Stock Option Plan.” The exercise price
      of this option was determined using the probability-weighted expected
      return method of valuation that measures the value of the shares on the
      basis of a weighted combination of income and market approaches assuming a
      sale of the company, and initial public offering and continued existence
      as a private company, with a discount for minority interest and lack of
      marketability.


46


Employment
Agreements




EPL has
employment agreements with each Named Executive Officer.




Term . Mr. Carley’s employment
agreement is dated September 27, 2005 and has a three-year term. Commencing on
January 1, 2007, and each January 1 thereafter, Mr. Carley’s employment term is
automatically extended for an additional year unless either party gives 60 days
prior notice of its intention not to extend the term. As a result of the timing
of these extensions, the term of Mr. Carley’s employment is a rolling three-year
period which currently expires November 18, 2011. The term of the other Named
Executive Officers’ employment agreements expires on November 18, 2010 with
respect to Mr. Stein, and on December 31, 2010 with respect to the other Named
Executive Officers. Each of the employment agreements (other than Mr. Carley’s)
has an automatic one-year renewal unless either party provides termination
notice at least 60 days prior to the end of the then applicable
term.





Base
Salary. Each agreement provides for a base annual salary that may be
increased at the sole discretion of the board of directors.




Bonus.
Contingent on our meeting certain financial goals, the target bonus for each
Named Executive Officer is 75% of the officer’s salary, except for Mr. Carley,
whose target bonus is 100% of his salary. The terms of the bonus are described
in Compensation Discussion and Analysis above under “Annual Bonus.”  All
executive officers with employment agreements waived their right to these
bonuses for 2009. In addition, Mr. Campanaro was entitled to a guaranteed
minimum bonus of $60,000 for 2009.




Employee
Benefits. Each Named Officer is entitled to receive health insurance,
retirement benefits and fringe benefits on the same basis as those benefits that
are made available to other senior executives. In addition, EPL is required to
provide Mr. Carley with a leased vehicle and pay the routine operating,
maintenance and fuel costs for such vehicle.




Termination.
If EPL terminates a Named Executive Officer for cause or a Named Executive
Officer resigns without good reason or dies or suffers from a disability, that
executive officer is entitled to accrued base annual salary for the then current
year to date, earned unpaid bonus from prior years, accrued expenses meriting
reimbursement and accrued unpaid benefits. If a Named Executive Officer dies or
suffers from a disability, the officer is also entitled to a pro rata bonus for
the then current year. If we terminate a Named Executive Officer without cause
or a Named Executive Officer resigns for good reason, that executive officer is
entitled to all of the foregoing compensation plus one year additional base
salary payable over 12 months, except that Mr. Carley is entitled to two years
of base salary and bonus payable in a lump sum on termination. These termination
provisions and additional information regarding the payments the Named Executive
Officers are entitled to receive upon termination or a change in control are
described under “Potential Payments Upon Termination or Change in Control”
below.




CAC
Stock Option Plan




All of
our stock options are granted by CAC pursuant to its 2005 Stock Option Plan and
represent the right to purchase CAC common stock. All options granted pursuant
to the plan are intended to be non-qualified stock options under the Internal
Revenue Code of 1986. Of the 289,217 options outstanding at December 31, 2009,
65,740 fully vested options were granted in connection with the Acquisition by
CAC in November 2005 in exchange for previously outstanding options to purchase
common stock of EPL Holdings, Inc. which were fully vested. Subsequent to the
Acquisition, CAC granted stock options, of which an aggregate of 223,477 options
were outstanding at December 30, 2009. Such options vest upon the achievement of
certain performance-based and time-based conditions as described in footnote (b)
to the table “Outstanding Equity Awards at Fiscal Year-End 2009” below. The
options terminate upon the optionee’s termination of service with the Company
subject to the optionee’s right to exercise the vested portion of the option for
a period of three to nine months after termination, depending on the cause of
termination; provided, however, that if an optionee is terminated by the Company
for cause, his options are forfeited. The options are subject to accelerated
vesting in the event of an initial public offering of at least $50,000,000 or a
change in control of CAC, as described under “Potential Payments Upon
Termination or Change in Control.” Upon the payment of a dividend with respect
to CAC common stock, the optionee is entitled to receive the economic equivalent
of such dividend as if all his options had been exercised prior to payment of
the dividend. The compensation committee of CAC, which is responsible for
administering the option plan, has the right to waive any conditions or rights
under, or amend any terms of, outstanding options, including the exercise price,
vesting provisions and term. Options are not transferable except with the prior
consent of the CAC compensation committee.


47


The
following table provides information about outstanding stock options held by the
Named Executive Officers at December 30, 2009.





Outstanding
Equity Awards at Fiscal Year-End 2009




Name
                                  
                                  Number of
                                    Securities
                                    Underlying
                                    Unexercised
                                    Options
                                    (#) Exercisable
                                    (a)
                                  
                                  
                                  Equity Incentive
                                    Plan Awards:
                                    Number of
                                    Securities Underlying
                                    Unexercised Unearned
                                    Options
                                    (#) (b)
                                  
                                  
                                  Option Exercise
                                    Price
                                    ($)
                                  
                                  Option Expiration
                                    DateStephen
      E. Carley
                                  
                                  
                                  22,845
                                  
                                  
                                  0
                                  
                                  
                                  
                                  7.56
                                  
                                  4/9/20110
                                  
                                  
                                  
                                  66,741
                                  
                                  
                                  
                                  86.43
                                  
                                  12/13/2015Gary
      Campanaro
                                  
                                  
                                  0
                                  
                                  
                                  
                                  11,123
                                  
                                  
                                  
                                  68.00
                                  
                                  9/12/2019Joseph
      N. Stein
                                  
                                  
                                  10,158
                                  
                                  
                                  
                                  0
                                  
                                  
                                  
                                  9.68
                                  
                                  4/9/20120
                                  
                                  
                                  
                                  22,247
                                  
                                  
                                  
                                  86.43
                                  
                                  12/13/2015Karen
      B. Eadon
                                  
                                  
                                  15,356
                                  
                                  
                                  
                                  0
                                  
                                  
                                  
                                  11.03
                                  
                                  10/12/20120
                                  
                                  
                                  
                                  22,247
                                  
                                  
                                  
                                  86.43
                                  
                                  12/13/2015Stephen
      J. Sather
                                  
                                  
                                  0
                                  
                                  
                                  
                                  17,778
                                  
                                  
                                  
                                  86.43
                                  
                                  12/13/2015Jeanne
      Scott
                                  
                                  
                                  5,079
                                  
                                  
                                  
                                  0
                                  
                                  
                                  
                                  11.77
                                  
                                  2/17/20130
                                  
                                  
                                  
                                  11,123
                                  
                                  
                                  
                                  86.43
                                  
                                  12/13/2015Brian
      Berkhausen
                                  
                                  
                                  0
                                  
                                  
                                  
                                  0
                                  
                                  
                                  
                                  -
                                  
                                  -





(a)
            These options were initially
      granted by our parent company prior to the Acquisition by CAC on November
      18, 2005 and were fully vested as of the date of the Acquisition.
      These options were exchanged for CAC options in connection with the
      Acquisition.





(b)
            These options vest in the
      following ways:





•
            These options will vest 20% per
      year over the five years following the grant date if the Company achieves
      its budgeted EBITDA target. If the options do not vest in a specific
      year, they will vest on cumulative basis if cumulative budged
      EBITDA is achieved. See footnote (a) to “Grants of Plan-Based Awards
      in Fiscal 2009” for an explanation of budgeted EBITDA. None of these
      options vested in 2009.





•
            Even if the performance targets
      are not met, these options will vest in full six to seven years after the
      grant date as long as the employee is still with the
      Company.





•
            100% of the options will vest
      upon the occurrence of an initial public offering of at least $50 million
      or a change in control of
CAC.




Potential
Payments Upon


Termination
or Change in Control




The
Company has entered into employment agreements and maintains certain other plans
and arrangements that require certain payments to the Named Executive Officers
in the event of a termination of employment with EPL or a change in control of
CAC. The potential amounts payable to each Named Executive Officer in each
situation are listed in the table below, except that the amounts for Mr.
Berkhausen represent amounts actually paid in connection with the termination of
his employment in 2009. These amounts do not include any payments or benefits to
which the officer is entitled irrespective of a termination or change in
control, such as accrued unpaid salary or employee benefits. The amounts payable
are calculated based on the assumptions that the event which triggered the
payments took place on December 30, 2009 (our fiscal year end), that the
employee was employed during the entire fiscal year and, where applicable, that
the per share price of CAC’s common stock on that date was
$46.00


48




Type of Payment/Recipient
                      
                      Termination by
                        EPL for
                        “Cause” or by
                        Officer Without
                        “Good Reason”
                        $
                      
                      
                      Termination
                        Due to
                        Death or
                        “Disability”
                        $
                      
                      
                      Termination by EPL
                        Without “Cause”
                        or by Officer For
                        “Good Reason”
                        $
                      
                      
                      “Change in
                        Control”
                        $Base
      SalaryStephen
      E. Carley
                      
                      
                      0
                      
                      
                      
                      0
                      
                      
                      
                      950,000
                      (1)
                      
                      
                      N/AGary
      Campanaro
                      
                      
                      0
                      
                      
                      
                      0
                      
                      
                      
                      250,000
                      (2)
                      
                      
                      N/AJoseph
      N. Stein
                      
                      
                      0
                      
                      
                      
                      0
                      
                      
                      
                      261,784
                      (2)
                      
                      
                      N/AKaren
      B. Eadon
                      
                      
                      0
                      
                      
                      
                      0
                      
                      
                      
                      269,528
                      (2)
                      
                      
                      N/AStephen
      J. Sather
                      
                      
                      0
                      
                      
                      
                      0
                      
                      
                      
                      241,020
                      (2)
                      
                      
                      N/AJeanne
      Scott
                      
                      
                      0
                      
                      
                      
                      0
                      
                      
                      
                      231,838
                      (2)
                      
                      
                      N/ABrian
      Berkhausen
                      
                      
                      0
                      
                      
                      
                      0
                      
                      
                      
                      247,615
                      (2)
                      
                      
                      N/ABonusStephen
      E. Carley
                      
                      
                      0
                      
                      
                      
                      225,625
                      (3)
                      
                      
                      225,625
                      (3)(4)
                      
                      
                      N/AGary
      Campanaro
                      
                      
                      0
                      
                      
                      
                      89,062
                      (3)
                      
                      
                      89,062
                      (3)
                      
                      
                      N/AJoseph
      N. Stein
                      
                      
                      0
                      
                      
                      
                      93,261
                      (3)
                      
                      
                      93,261
                      (3)
                      
                      
                      N/AKaren
      B. Eadon
                      
                      
                      0
                      
                      
                      
                      96,019
                      (3)
                      
                      
                      96,019
                      (3)
                      
                      
                      N/AStephen
      J. Sather
                      
                      
                      0
                      
                      
                      
                      85,863
                      (3)
                      
                      
                      85,863
                      (3)
                      
                      
                      N/AJeanne
      Scott
                      
                      
                      0
                      
                      
                      
                      82,592
                      (3)
                      
                      
                      82,592
                      (3)
                      
                      
                      N/ABrian
      Berkhausen
                      
                      
                      0
                      
                      
                      
                      N/A
                      
                      
                      
                      N/A
                      
                      
                      
                      N/AGain
      on Sale of CAC Stock (5)Stephen
      E. Carley
                      
                      
                      0
                      
                      
                      
                      878,162
                      
                      
                      
                      878,162
                      
                      
                      
                      N/AGary
      Campanaro
                      
                      
                      0
                      
                      
                      
                      0
                      
                      
                      
                      0
                      
                      
                      
                      N/AJoseph
      N. Stein
                      
                      
                      0
                      
                      
                      
                      368,938
                      
                      
                      
                      368,938
                      
                      
                      
                      N/AKaren
      B. Eadon
                      
                      
                      0
                      
                      
                      
                      536,999
                      
                      
                      
                      536,999
                      
                      
                      
                      N/AStephen
      J. Sather
                      
                      
                      0
                      
                      
                      
                      0
                      
                      
                      
                      0
                      
                      
                      
                      N/AJeanne
      Scott
                      
                      
                      0
                      
                      
                      
                      173,854
                      
                      
                      
                      173,854
                      
                      
                      
                      N/ABrian
      Berkhausen
                      
                      
                      0
                      
                      
                      
                      N/A
                      
                      
                      
                      602,087
                      
                      
                      
                      N/AAcceleration
      of Stock Options (6)Stephen
      E. Carley
                      
                      
                      N/A
                      (7)
                      
                      
                      N/A
                      
                      
                      
                      N/A
                      
                      
                      
                      0Gary
      Campanaro
                      
                      
                      N/A
                      (7)
                      
                      
                      N/A
                      
                      
                      
                      N/A
                      
                      
                      
                      0Joseph
      N. Stein
                      
                      
                      N/A
                      (7)
                      
                      
                      N/A
                      
                      
                      
                      N/A
                      
                      
                      
                      0Karen
      B. Eadon
                      
                      
                      N/A
                      (7)
                      
                      
                      N/A
                      
                      
                      
                      N/A
                      
                      
                      
                      0Stephen
      J. Sather
                      
                      
                      N/A
                      (7)
                      
                      
                      N/A
                      
                      
                      
                      N/A
                      
                      
                      
                      0Jeanne
      Scott
                      
                      
                      N/A
                      (7)
                      
                      
                      N/A
                      
                      
                      
                      N/A
                      
                      
                      
                      0Brian
      Berkhausen
                      
                      
                      N/A
                      (7)
                      
                      
                      N/A
                      
                      
                      
                      N/A
                      
                      
                      
                      0


(1)
            Lump-sum payment equal to two
      times base salary on the date of
  termination.




(2)
            Unless termination is due to
      voluntary resignation after reaching age 60, the officer receives
      continued salary for 12 months subject to compliance with non-competition,
      non-solicitation and confidentiality covenants, which are described
      below.




(3)
            The officer is entitled to a
      pro-rata portion of the bonus earned pursuant to his employment agreement
      based on the percentage of the year the officer was employed, payable when
      the bonus would have otherwise been paid. The estimated payment above
      assumes that the officer was employed the entire fiscal year.




(4)
            Lump-sum payment equal to two
      times average bonus earned pursuant to his employment agreement in the two
      completed fiscal years prior to the date of
      termination.


49


(5)
            Pursuant to the terms of a
      Stockholders Agreement described in “Item 13. Certain Relationships and
      Related Transactions and Director Independence,” in the event of
      termination of employment by EPL without cause or by the officer for good
      reason, the officer has the right to require CAC to purchase all of his or
      her shares of CAC stock (including shares underlying vested options) at
      their fair market value as determined by the board of CAC. Upon the
      officer’s termination of employment for any reason, CAC has the right (but
      not the obligation) to purchase all of the officer’s CAC stock (including
      shares underlying vested options) at (i) the lower of cost or fair market
      value if termination is by EPL for cause or by the officer without good
      reason, or (ii) fair market value if termination is for any other reason.
      In the case of termination due to death or disability, or by EPL without
      cause or by the officer for good reason, this table assumes that CAC
      purchases all CAC shares held by the officer (including shares underlying
      vested options) and the amount represents the difference between the
      officer’s cost (exercise price in the case of option shares) and $46.00,
      the fair value of CAC stock at December 30, 2009. No amounts are reported
      in the event of termination for cause or without good reason since the
      officer would be paid only his cost of the shares, resulting in no gain on
      the transaction. These purchase rights terminate upon the occurrence of an
      initial public offering of at least $50
  million.




(6)
            Upon a change in control of CAC
      (defined below), options become 100% vested. The dollar amount is zero
      because the exercise price of the options that would accelerate upon a
      change in control exceeds the fair value of CAC stock on December 30, 2009
      ($46.00). See the table “Outstanding Equity Awards at Fiscal Year-End
      2009.”




(7)
            The officer forfeits his or her
      options in the event of termination for
  cause.




Our
employment agreements with the Named Executive Officers contain definitions of
the terms “cause,” “good reason” and “disability” as used in the foregoing
table.





The term
“cause” means any action by a Named Executive Officer that
constitutes:





•
            Misconduct, dishonesty or failure
      to comply with specific directions of the board of directors (after a 20
      day period to cure such misconduct or
  failure);





•
            A deliberate and premeditated act
      against the Company or its
affiliates;





•
            The commission of a
      felony;





•
            Substance abuse or alcohol abuse
      which renders the officer unfit to perform his
    duties;





•
            A breach by the officer of
      non-competition and non-solicitation obligations contained in the
      employment agreement; or





•
            Voluntary termination of
      employment in anticipation of being terminated for
      cause.





A Named
Executive Officer may terminate his or her employment for “good reason”
if:





•
            The officer is relocated outside
      of Orange County, California, and the Company fails to cure within 30 days
      of notice;





•
            The officer’s title is reduced
      and the Company fails to cure within 30 days of
    notice;





•
            The Company fails to provide the
      officer with any of the employee benefits he is entitled to pursuant to
      his employment agreement and, except in the case of the CEO, the Company
      fails to cure within 30 days of
notice;





•
            In the case of Mr. Carley only,
      (i) he is removed from the board of directors or is not re-elected to the
      board of directors at any time during his employment term; or (ii) the
      Company elects not to extend the term of his employment agreement for an
      additional year, provided that he will not have good reason to terminate
      his employment in this case until the expiration of the employment term in
      effect at the time that the Company elects not to extend the employment
      term; or





•
            In the case of all Named
      Executive Officers other than Mr. Carley, the officer’s base salary (as
      increased from time to time) is reduced or there is a change in his
      reporting relationship and the Company fails to cure within 30 days of
      notice, or the officer resigns after reaching age
    60.




A
“disability” exists if an officer becomes physically or mentally incapacitated
and is therefore unable to perform his duties for a period of six (6)
consecutive months or for an aggregate of nine (9) months in any twenty-four
(24) consecutive month period. If the Company and officer cannot agree, a
qualified independent physician will decide whether a disability
exits.


50


Except
with respect to Mr. Carley, each Named Executive Officer’s right to receive base
salary payments for 12 months after termination by the Company without cause or
by the officer with good reason, is subject to the officer’s compliance with
non-competition, non-solicitation and confidentiality covenants contained in his
or her employment agreement. The non-competition provision generally prohibits
the officer for one year after termination from engaging in, working for, or
owning a financial interest in, any business that operates quick-service
restaurants that compete directly with EPL or its affiliates in any market in
which EPL or its affiliates operate restaurants or have targeted operating
restaurants at the time of the officer’s termination. The non-solicitation
covenant generally prohibits the officer from soliciting any employee or
consultant of the Company or its affiliates to cease working for the Company or
its affiliates, for a period of one year after the officer terminates
employment. The confidentiality provision prohibits the officer from disclosing
or using Company trade secrets or confidential information at any
time.




Pursuant
to the terms of our stock option agreements, upon the occurrence of a change in
control of CAC, options become fully vested and exercisable by the officer
immediately prior to the change in control, but contingent upon the
effectiveness of the change in control. If the options are not exercised, they
will automatically terminate on the effectiveness of the change in control
unless the surviving or acquiring company agrees to assume the options or to
substitute new options. A “change in control” of CAC exists when:




•
            Trimaran Fund II, LLC, Trimaran
      Parallel Fund II, LP, Trimaran Capital, LLC, CIBC Employee Private Equity
      Fund (Trimaran) Partners, CIBC Capital Corp., Trimaran Pollo Partners, LLC
      (or any investment fund or other entity directly or indirectly controlled
      by or under common control with such entities) (the “Permitted Holders”)
      collectively fail to beneficially own at least 40% of the outstanding
      shares of CAC common stock, unless such failure occurs as a result of a
      public offering with an aggregate cash offering price of at least
      $50,000,000;





•
            There is a sale of all or
      substantially all of the assets of CAC and its subsidiaries to a party
      other than a Permitted Holder;
or





•
            The CAC stockholders approve a
      complete liquidation or dissolution of
  CAC.




Fiscal
2009 Director Compensation




Only
directors who our board has determined are independent are compensated by us for
their services as directors of the Company and EPL. We pay our independent
directors a fee of $2,500 per day for attendance at meetings of the board of
directors and the following fees for attending committee meetings that are held
on days other than days on which board meetings are held: $2,000 per meeting to
the chairman of a committee and $1,000 per meeting to other committee members.
All directors are reimbursed their reasonable expenses for attending meetings
and, pursuant to a Monitoring and Management Services Agreement, the Company
reimburses Trimaran Fund Management, LLC and Freeman Spogli & Co. V,
L.P. the travel and related expenses of their designees to our and CAC’s
board of directors. See “Item 13. Certain Relationships and Related Transactions
and Director Independence.”




Name
                
                Fees Earned orPaid inCash
                
                
                Stock Awards
                
                
                TotalDouglas
      K. Ammerman (a)
                
                $
                26,000
                
                
                $
                27,472
                
                
                $
                53,472Andrew
      Heyer, Dean C. Kehler, Jeffery Naumowitz, Alberto Robaina, John M. Roth
      and Griffin Whitney (b)
                
                
                0
                
                
                
                0
                
                
                
                0





(a)
            Mr. Ammerman was awarded 404
      shares of CAC restricted stock pursuant to the CAC 2008 Restricted Stock
      Plan for Independent Directors. One-half of the shares vested on January
      31, 2010 and the balance vest on January 31, 2011. The shares also vest
      100% upon the occurrence of an initial public offering of at least $50
      million or a change in control of CAC. The amount shown represents the
      grant date fair value of the shares computed in accordance with the SEC’s
      rules.





(b)
            All of these persons are
      designees of either Trimaran or the FS Parties (as defined below
      under “LLC Operating Agreement”) and are compensated as employees of
      affiliates of such companies for their services to such affiliates and not
      for their services to
us.


51


Compensation
Committee Interlocks and Insider Participation





In 2009,
our compensation committee was comprised of Douglas Ammerman, Andrew Heyer and
John Roth. Mr. Heyer served as a Vice President of the Company until February
2008, but he was not an employee of the Company. Mr. Heyer serves as a director
as the designee of Trimaran Capital, LLC (“Trimaran”) and Mr. Roth serves as a
director as the designee of the FS Parties, pursuant to the LLC Operating
Agreement described below. Mr. Ammerman is an independent director.





Certain
Relationships




The
Company and EPL are indirect wholly owned subsidiaries of CAC. The principal
stockholder of CAC is Trimaran Pollo Partners, LLC (the “LLC”). The remaining
..4% of the common stock of CAC and options to purchase stock of CAC are held by
the Company’s executive officers, director Douglas Ammerman and certain other
current and former EPL employees and directors (the “Management Stockholders”).
The LLC is controlled by Trimaran, which is the managing member of the
LLC.




Company
director Dean Kehler is a Managing Partner of Trimaran. He and Andrew Heyer are
each one-third owners of Trimaran, which is the Managing Member of the LLC. Mr.
Kehler is also a managing member and co-owner of Trimaran Fund Management,
LLC.




The
stockholders agreement, LLC operating agreement and monitoring and management
services agreement described below were each initially entered into in
connection with the LLC’s 2005 acquisition of the Company through
CAC.





Stockholders
Agreement




CAC, the
LLC and the Management Stockholders are parties to a stockholders agreement
dated November 18, 2005. The stockholders agreement generally restricts the
transfer of shares of CAC common stock and options by the parties, except for
certain transfers of shares for estate planning purposes and certain involuntary
transfers in connection with a default, foreclosure, forfeiture, divorce, court
order or otherwise than by a voluntary decision of the stockholder (so long as
CAC, and if CAC does not exercise its right, the other stockholders, have been
given the opportunity to purchase, pro rata, the common stock subject to such
involuntary transfer).




The
parties to the stockholders agreement have “tag-along” rights to sell their
shares, on a pro rata basis with the LLC, in significant sales by the LLC to
third parties. The LLC has “drag-along” rights to cause the other parties to the
stockholders agreement to sell their shares, on a pro rata basis with the LLC,
in significant sales by the LLC to third parties. Management Stockholders are
subject to “put” and “call” rights, which entitle these persons to require CAC
to purchase their shares or options, and which entitle CAC to require these
persons to sell their shares or options to CAC, upon certain terminations of the
party’s employment with the Company, at differing prices, depending upon the
circumstances of the termination. For a description of these provisions, see
“Item 11. Executive Compensation - Potential Payments Upon Termination or Change
in Control.” The stockholders agreement also includes pre-emptive rights in
favor of the LLC and the Management Stockholders with respect to the issuance of
certain equity securities by CAC or its subsidiaries, including the
Company.




The LLC
has the right to require CAC to effect a public offering of the Company’s, or
any other CAC subsidiary’s, common stock at an aggregate offering price of at
least $50,000,000. In such event, the LLC will have the right to designate all
material terms of such offering, including the underwriters to be retained. The
stockholders agreement also gives Trimaran and its affiliates and the FS Parties
(as defined below under “LLC Operating Agreement”) certain rights to request
that CAC register their shares under the Securities Act of 1933. In demand
registrations, the other parties to the stockholders agreement have certain
rights to participate on a pro rata basis.




The
stockholders agreement terminates upon the consummation of (1) an initial public
offering by CAC or its subsidiaries at an aggregate offering price of at least
$50,000,000 or (2) a sale of all or substantially all of the assets or equity
interests in CAC to a third party (whether by merger, consolidation, sale of
assets or securities or otherwise). The registration rights provisions of the
agreement, and certain other provisions, survive termination.





LLC
Operating Agreement




Pursuant
to the terms of the LLC’s Second Amended and Restated Limited Liability Company
Operating Agreement, dated March 8, 2006, as amended December 26, 2007 to add as
members of the LLC FS Equity Partners V, L.P. and FS Affiliates V, L.P.
(jointly, the “FS Funds”) and Peter Starrett (together with the FS Funds,
the “FS Parties”),




·
            certain
      funds affiliated with Trimaran have the right to designate all of the
      directors of CAC except as set forth below (“Trimaran
      directors”);


52


·
            the
      FS Parties have the right to appoint one director of CAC so long as they
      collectively hold 5% or more of the LLC’s membership
  units;





·
            until
      the FS Parties hold less than 15% of the LLC’s membership
      units, their director designee is entitled to serve on the
      Company’s compensation committee;





·
            the FS Parties have certain
      observer rights with respect to board and committee meetings of CAC, the
      Company and EPL and the Company pays the costs of such observers to attend
      board and committee
meetings;





·
            each other member of the LLC that
      holds at least a 15% interest in the LLC has the right to designate a
      director to the board of CAC;
and





·
            the chief executive officer of El
      Pollo Loco Holdings, Inc. (our parent company), currently Stephen Carley
      (also the Company’s and EPL’s chief executive officer), must be elected a
      director of CAC.




The
operating agreement requires that the board of directors of each material
subsidiary of CAC consist of the same proportion of Trimaran directors and
non-Trimaran directors as that of the CAC board of directors and that such
directors be elected and appointed in the same manner as the CAC board.
Accordingly, pursuant to the operating agreement, Andrew Heyer, Dean Kehler,
Jeffrey Naumowitz, Alberto Robaina and Griffin Whitney serve on the Company’s
and EPL’s board of directors as Trimaran directors, John Roth serves as a
director as the designee of the FS Parties, and Stephen Carley serves as a
non-Trimaran director. Mr. Roth is a managing member of FS Capital Partners V,
LLC (which is the general partner of the FS Funds).




The
operating agreement also requires the LLC to use its reasonable best efforts to
provide that directors’ and officers’ liability insurance maintained by CAC and
indemnification rights applicable to CAC directors are similarly maintained and
applicable to directors of CAC’s subsidiaries. The operating agreement will
terminate and the LLC will dissolve on the earlier of the election of the
managing member of the LLC or six years following an initial public offering by
CAC or any of its subsidiaries, such as the Company.





Monitoring
and Management Services Agreement




Under the
terms of a Monitoring and Management Services Agreement entered into on November
18, 2005, as amended December 26, 2007, between CAC and Trimaran Fund
Management, LLC (“Fund Management”), CAC pays Fund Management and Freeman Spogli
& Co. V, L.P. (“FS”) (together, the “Advisors”) an annual fee of $357,000
and $143,000, respectively, payable in quarterly installments, for the Advisors
to be available to provide advisory and monitoring services to CAC and its
subsidiaries, including the Company and EPL, as requested by CAC. In addition,
CAC must reimburse the Advisors for all reasonable out of pocket expenses
incurred by them in connection with their services, including fees and expenses
paid to third parties and travel and related expenses of their designees who
serve on the board of CAC and the Company. The Company paid Fund Management and
FS $372,000 and $155,000 respectively, in 2009 on behalf of CAC pursuant to this
agreement. Company director John Roth is a managing member of the general
partner of FS.




Fund
Management has a right of first offer to serve as financial advisor in
connection with any initial public offering, merger, sale of stock or
substantially all the assets, recapitalization, reorganization or similar
transaction by CAC or any of its subsidiaries, including the Company and EPL. If
Fund Management serves as a financial advisor in connection with any such
transaction, Fund Management and FS will receive a fee equal to 1.4286% and
..5714%, respectively, of the gross transaction value and reimbursement of
reasonable out-of-pocket expenses. If this agreement is terminated in connection
with an initial public offering by CAC or any of its subsidiaries, including the
Company or EPL, Fund Management and FS will be entitled to an additional
one-time fee of $1,786,000 and $714,000, respectively. CAC and its subsidiaries,
including the Company and EPL, must indemnify Fund Management and FS and their
affiliates and their respective partners, members, directors, officers,
employees and agents from any claims or liabilities arising in connection with
their services to CAC under the agreement, unless such claims or liabilities
result primarily from the gross negligence, willful misconduct or fraud of any
such person. This agreement continues in effect as to each Advisor until such
Advisor elects to terminate it.


53


Purchase
of Restaurants and Termination of Development Agreement




Trimaran
and certain of its affiliates that are members of the LLC collectively
beneficially own about 70% and the FS Funds together beneficially own about
28% of Fiesta Brands, Inc. We entered into a development agreement with
Fiesta Brands on August 10, 2006. This development agreement gave Fiesta Brands
the right to develop 25 restaurants, with an option for 25 additional
restaurants, in Atlanta, Georgia and surrounding counties. Fiesta Brands paid
EPL a $250,000 fee upon execution of the agreement. Through September 24, 2009,
Fiesta Brands opened a total of nine restaurants, for which it paid franchise
and other fees on the same terms as other franchisees. This development
agreement was, and the franchise agreements executed when each restaurant was
opened were, on substantially the same terms and conditions as those with
non-affiliated franchisees and we believe that the terms and conditions were no
less favorable than we could have obtained from an unaffiliated third party.
Pursuant to a Termination of Franchise Rights and Mutual Release dated September
24, 2009 between EPL and Fiesta Brands, the parties terminated all of their
respective rights and obligations under the development agreement and various
franchise agreements relating to the nine El Pollo Loco® restaurants opened by
Fiesta Brands pursuant to the development agreement.





As of
September 24, 2009, EPL entered into an Asset Purchase Agreement with Fiesta
Brands pursuant to which EPL purchased four El Pollo Loco® restaurants located
in the Atlanta, Georgia area previously owned and operated by Fiesta Brands and
related assets, and assumed various operating contracts, including the leases,
relating to the four purchased restaurants. EPL also purchased furniture,
fixtures and equipment of five other El Pollo Loco® restaurants previously
operated by Fiesta Brands. The purchase price for the restaurants and assets was
$1,720,000. EPL will continue to operate the four purchased restaurants. The
remaining five restaurants previously operated by Fiesta have
closed.





Item
12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters




We hold
all of the outstanding common stock of EPL. All of our 100 outstanding common
shares are held by El Pollo Loco Holdings, Inc., which is indirectly wholly
owned by CAC.




Due to
its ownership of 99.6% of the outstanding common stock of CAC and its ability to
elect all of the directors of CAC, Trimaran Pollo Partners, LLC (the “LLC”) is
deemed to be the beneficial owner of 100% of our common stock. The address of
the LLC is 1325 Ave of the Americas, New York, New York 10019. The remaining .4%
of CAC’s common stock is owned by the Company’s executive officers, certain
current and former directors, and other current and former EPL
employees.




The
managing member of the LLC, which has complete voting and management authority
for the LLC and the right to appoint a majority of the directors of CAC, the
Company and EPL, is Trimaran Capital, LLC (“Trimaran”). Trimaran is beneficially
owned one-third by each of Andrew Heyer and Dean Kehler, directors of the
Company. Messrs. Heyer and Kehler disclaim beneficial ownership of shares of CAC
and the Company except to the extent of their pecuniary interest
therein.




None of
our equity securities are authorized for issuance under any equity compensation
plan. CAC maintains a stock option plan as described in Item 11.





Item
13. Certain Relationships and Related Transactions and Director
Independence




The
information set forth in “Item 11. Executive Compensation - Compensation
Committee Interlocks and Insider Participation” is incorporated herein by
reference.




Policy
Regarding Approval of Related Party Transactions




The
Company’s board of directors has adopted a written policy regarding approval of
related party transactions which requires that all “interested transactions”
with “related parties” shall be subject to approval or ratification by the
Company’s audit committee. In determining whether to approve an interested
transaction, the audit committee will take into account, among other factors it
deems appropriate, whether the transaction is on terms no less favorable than
terms generally available to an unaffiliated third party under the same or
similar circumstances, the extent of the related person’s interest in the
transaction, the benefits to the Company, and the impact, if any, of the
transaction on the independence of any director. No member of the audit
committee who has a direct or indirect interest in an interested transaction may
participate in the discussion or approval of such transaction.




The
policy defines an “interested transaction” as any transaction, arrangement or
relationship (or series of similar transactions, arrangements or relationships),
including indebtedness or guarantees of indebtedness, in which


54


•
            The aggregate amount involved
      will or may be expected to exceed $100,000 in any calendar
      year,





•
            The Company or any of its
      subsidiaries is a participant,
and





•
            Any related party has or will
      have a direct or indirect interest (other than solely as a result of being
      a director or, together with all other related parties, being in the
      aggregate a less than 10% beneficial equity owner of another
      entity).





A
“related party” is an executive officer, a director or nominee for election as a
director, a greater than five percent (5%) beneficial owner of the Company’s
common stock, and any immediate family member (as such term is defined in the
SEC’s rules) of any of the foregoing.




The
policy provides that the following interested transactions are deemed to be
pre-approved by the audit committee without further action:




•
            Any director or executive officer
      compensation required to be disclosed in our SEC reports or that has been
      approved (or recommended to the board for approval) by our compensation
      committee; and





•
            Any transaction that has been
      approved by El Pollo Loco Holdings, Inc. or CAC, our direct and indirect
      parent companies,
respectively.





Director
Independence




In
determining the independence of our directors, we use the definition of
independence under the applicable rules of The Nasdaq Stock Market (“Nasdaq”);
however, our common stock is not listed on such exchange. Under these rules, we
would be considered a “controlled company” since more than 50% of our voting
power is held by another company. As a controlled company, we would be exempt
from the Nasdaq requirements that a majority of our board consist of independent
directors and that our compensation and nominating committees be comprised
solely of independent directors. The Nasdaq rules would require us to have an
audit committee comprised of at least three members, all of whom are independent
and meet certain other requirements.




Based on
the Nasdaq definition of independence, our board of directors has determined
that Douglas Ammerman is independent. Mr. Ammerman, who is independent, and Dean
C. Kehler and Jeffrey J. Naumowitz, who are not independent, serve on our audit
committee. Our compensation committee is comprised of Douglas Ammerman, who is
independent, and Andrew Heyer and John Roth, both of whom are not independent.
We do not have a nominating committee.





Item
14. Principal Accountant Fees and Services




The
following fees were billed by Deloitte & Touche LLP (“Deloitte”) in 2008 and
2009:




Audit
Fees




Audit
fees for the audit of our 2009 annual financial statements and the review of the
financial statements included in our Quarterly Reports on Form 10-Q totaled
$443,000.




Audit
fees for the audit of our 2008 annual financial statements and the review of the
financial statements included in our Quarterly Reports on Form 10-Q in 2008
totaled $432,000.




Audit-Related
Fees




We were
not billed by Deloitte for any audit-related fees in 2008 and 2009.




Tax
Fees




Fees
billed to us by Deloitte for professional services for tax compliance, tax
advice and tax planning totaled $83,000 in 2009 and $99,000 in 2008. The fees
disclosed under this category are comprised by services that include assistance
related to state tax incentives.


55


All
Other Fees





We did
not incur any other fees billed to us by Deloitte during 2008 and
2009.





Pre-Approval
Policies and Procedures




The Audit
Committee’s policy is to pre-approve all audit and permissible non-audit
services performed by the independent auditors. These services may include audit
services, audit-related services, tax services and other services. For audit
services, the independent auditor provides an engagement letter in advance of
the February meeting of the Audit Committee, outlining the scope of the audit
and related audit fees. If agreed to by the Audit Committee, this engagement
letter is formally accepted by the Audit Committee at its February Audit
Committee meeting.




For
non-audit services, our senior management submits from time to time to the Audit
Committee for pre-approval non-audit services that it recommends the Audit
Committee engage the independent auditor to provide for the fiscal year. Our
senior management and the independent auditor each confirms to the Audit
Committee that each non-audit service is permissible under all applicable legal
requirements. A budget, estimating non-audit service spending for the fiscal
year, is provided to the Audit Committee along with the request. The Audit
Committee must pre-approve both permissible non-audit services and the budget
for such services. The Audit Committee is informed routinely as to the non-audit
services actually provided by the independent auditor pursuant to this
pre-approval process. The foregoing pre-approval process is subject to an
authorization given by the Audit Committee to the Chief Financial Officer and
the Committee Chairman to approve and engage the independent auditor for those
supplemental services determined to be necessary or in the best interest of the
Company in an aggregate amount of $25,000 per year without Audit Committee
pre-approval.   Any proposed services that exceed this amount require
approval by the Audit Committee.





Except
for those supplemental services approved by the Chief Financial Officer and
Committee Chairman, the Audit Committee approved all of the services provided by
Deloitte described above and determined that the provision of the non-audit
services listed above was compatible with maintaining the independence of
Deloitte.





PART
IV




Item 15. Exhibits and Financial Statement
Schedules




(a) 1.
and 2. Financial Statements and Schedules




The
financial statements listed below which appear on the pages indicated are filed
as part of this annual report. Financial statement schedules are omitted because
they are not required or are not applicable or the required information is
provided in the financial statements or notes thereto.


Index to Financial
Statements





PageConsolidated
      Financial Statements of EPL Intermediate, Inc.:Report
      of Independent Registered Public Accounting Firm
                              
                              F-1Consolidated
      Balance Sheets as of December 31, 2008 and December 30,
    2009
                              
                              F-2Consolidated
      Statements of Operations for the Years Ended December 26, 2007, December
      31, 2008 and December 30, 2009
                              
                              F-4Consolidated
      Statement of Stockholder’s Equity for the Years Ended December 26,
      2007, December 31, 2008 and December 30, 2009
                              
                              F-5Consolidated
      Statements of Cash Flows for the Years Ended December 26, 2007, December
      31, 2008 and December 30, 2009
                              
                              F-6Notes
      to Consolidated Financial Statements
                              
                              F-8Financial
      Statements of El Pollo Loco, Inc. filed pursuant to SEC Rule 3-16 of
      Regulation S-X:Report
      of Independent Registered Public Accounting Firm
                              
                              F-30El
      Pollo Loco, Inc. Balance Sheets as of December 31, 2008 and December 30,
      2009
                              
                              F-31El
      Pollo Loco, Inc. Statements of Operations for the Years Ended December 26,
      2007, December 31, 2008 and December 30, 2009
                              
                              F-32El
      Pollo Loco, Inc. Statement of Stockholder’s Equity for the Years Ended
      December 26, 2007, December 31, 2008 and December 30, 2009
                              
                              F-33El
      Pollo Loco, Inc. Statements of Cash Flows for the Years Ended December 26,
      2007, December 31, 2008 and December 30, 2009
                              
                              F-34Notes
      to Financial Statements
                              
                              F-35





3. Exhibits - See the Exhibit
Index which follows the financial statements included in this Report for a list
of exhibits. The Exhibit Index is incorporated herein by this
reference.


56


SIGNATURES




Pursuant
to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.





March
      30, 2010
              EPL
      INTERMEDIATE, INC.By:
              /s/ Gary CampanaroGary
      CampanaroSenior
      Vice President





Pursuant
to the requirements of the Securities and Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the registrant in the
capacities and on the dates indicated.





Signature
                        
                        Title
                        
                        Date/s/ Stephen E. Carley
                        
                        President
      (Principal Executive Officer), Director
                        
                        March
      30, 2010Stephen
      E. Carley/s/ Gary Campanaro
                        
                        Senior
      Vice President of Finance, Chief Financial Officer
                        
                        March
      30, 2010Gary
      Campanaro
                        
                        (Principal
      Financial and Accounting Officer)/s/ Douglas K. Ammerman
                        
                        Director
                        
                        March
      30, 2010Douglas
      K. AmmermanDirector
                        
                        March
      30, 2010Andrew
      R. HeyerDirector
                        
                        March
      30, 2010Dean
      C. Kehler/s/ Jeffrey J. Naumowitz
                        
                        Director
                        
                        March
      30, 2010Jeffrey
      J. Naumowitz/s/ Alberto Robaina
                        
                        Director
                        
                        March
      30, 2010Alberto
      Robaina/s/ John M. Roth
                        
                        Director
                        
                        March
      30, 2010John
      M. Roth/s/ Griffin Whitney
                        
                        Director
                        
                        March
      30, 2010Griffin
      Whitney


57


REPORT
OF MANAGEMENT ON INTERNAL CONTROLS





Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f)
under the Securities Exchange Act of 1934. Our internal control over financial
reporting is designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. All
internal control systems, no matter how well designed, have inherent
limitations. Therefore, even those systems determined to be effective can
provide only reasonable assurance with respect to financial reporting, and
misstatements may not be prevented or detected.





Management
has assessed the effectiveness of our internal control over financial reporting
as of December 30, 2009. In making its assessment of internal control over
financial reporting, management used the criteria set forth in Internal Control
- Integrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO).




Our
Management has concluded that based on our assessment, as of December 30, 2009,
our internal control over financial reporting was effective.




This
annual report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by such accounting firm
pursuant to temporary rules of the Securities and Exchange Commission that
permit the Company to provide only management’s report in the annual
report.


58


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM




To the
Board of Directors and Stockholders of


EPL
Intermediate, Inc.


Costa
Mesa, California





We have
audited the accompanying consolidated balance sheets of EPL Intermediate, Inc.
and its subsidiary (the “Company”), a wholly owned subsidiary of El Pollo Loco
Holdings, Inc., as of December 30, 2009, and December 31, 2008, and the related
consolidated statements of operations, stockholder’s equity, and cash flows for
each of the years ended December 30, 2009, December 31, 2008 and December 26,
2007. These financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these financial
statements based on our audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.





In
our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of December 30, 2009
and December 31, 2008, and the results of its operations and its cash flows for
each of the years ended December 30, 2009, December 31, 2008 and December 26,
2007, in conformity with accounting principles generally accepted in the United
States of America.





/s/
DELOITTE & TOUCHE LLP





Costa
Mesa, California


March30,
2010


F-1





EPL
      INTERMEDIATE, INC.(A
      Wholly Owned Subsidiary of El Pollo Loco Holdings,
Inc.)CONSOLIDATED
      BALANCE SHEETS(Amounts in
  thousands)




DECEMBER
      31,
                          
                          
                          DECEMBER
      30,2008
                          
                          
                          2009ASSETSCURRENT
      ASSETS:Cash
      and cash equivalents
                          
                          $
                          1,076
                          
                          
                          $
                          11,277Restricted
      cash
                          
                          
                          -
                          
                          
                          
                          131Accounts
      and other receivables--net
                          
                          
                          4,472
                          
                          
                          
                          9,607Inventories
                          
                          
                          1,756
                          
                          
                          
                          1,606Prepaid
      expenses and other current assets
                          
                          
                          4,640
                          
                          
                          
                          5,262Income
      taxes receivable
                          
                          
                          43
                          
                          
                          
                          -Deferred
      income taxes
                          
                          
                          1,740
                          
                          
                          
                          327Total
      current assets
                          
                          
                          13,727
                          
                          
                          
                          28,210PROPERTY
      OWNED--Net
                          
                          
                          84,321
                          
                          
                          
                          77,344PROPERTY
      HELD UNDER CAPITALLEASES--Net
                          
                          
                          732
                          
                          
                          
                          524GOODWILL
                          
                          
                          249,924
                          
                          
                          
                          249,924DOMESTIC
      TRADEMARKS
                          
                          
                          103,100
                          
                          
                          
                          91,788OTHER
      INTANGIBLE ASSETS--Net
                          
                          
                          9,157
                          
                          
                          
                          1,900OTHER
      ASSETS
                          
                          
                          6,310
                          
                          
                          
                          12,200TOTAL
      ASSETS
                          
                          $
                          467,271
                          
                          
                          $
                          461,890See
      notes to consolidated financial statements.
                          
                          
                          
                          
                          
                          (continued)


F-2





EPL
      INTERMEDIATE, INC.(A
      Wholly Owned Subsidiary of El Pollo Loco Holdings,
Inc.)CONSOLIDATED
      BALANCE SHEETS(Amounts in thousands, except share
      data)




DECEMBER
      31,
                        
                        
                        DECEMBER
      30,2008
                        
                        
                        2009LIABILITIES
      AND STOCKHOLDER’S EQUITYCURRENT
      LIABILITIES:Revolving
      credit facility
                        
                        $
                        5,000
                        
                        
                        $
                        -Current
      portion of note payable
                        
                        
                        5,889
                        
                        
                        
                        -Current
      portion of senior secured notes
                        
                        
                        250
                        
                        
                        
                        -Current
      portion of obligations undercapital
      leases
                        
                        
                        601
                        
                        
                        
                        341Accounts
      payable
                        
                        
                        12,441
                        
                        
                        
                        20,607Accrued
      salaries
                        
                        
                        3,410
                        
                        
                        
                        4,289Accrued
      vacation
                        
                        
                        2,075
                        
                        
                        
                        2,010Accrued
      insurance
                        
                        
                        1,723
                        
                        
                        
                        1,545Accrued
      income taxes payable
                        
                        
                        -
                        
                        
                        
                        15Accrued
      interest
                        
                        
                        1,658
                        
                        
                        
                        3,432Accrued
      advertising
                        
                        
                        380
                        
                        
                        
                        96Other
      accrued expenses and current liabilities
                        
                        
                        6,196
                        
                        
                        
                        5,239Total
      current liabilities
                        
                        
                        39,623
                        
                        
                        
                        37,574NONCURRENT
      LIABILITIES:Senior
      secured notes (2012 Notes)
                        
                        
                        -
                        
                        
                        
                        130,407Senior
      unsecured notes payable (2013 Notes)
                        
                        
                        108,163
                        
                        
                        
                        106,347PIK
      Notes (2014 Notes)
                        
                        
                        25,980
                        
                        
                        
                        29,342Note
      payable--less current portion
                        
                        
                        93,464
                        
                        
                        
                        -Obligations
      under capital leases--lesscurrent
      portion
                        
                        
                        2,104
                        
                        
                        
                        1,763Deferred
      income taxes
                        
                        
                        23,642
                        
                        
                        
                        37,776Other
      intangible liabilities--net
                        
                        
                        4,883
                        
                        
                        
                        3,998Other
      noncurrent liabilities
                        
                        
                        12,832
                        
                        
                        
                        10,673Total
      noncurrent liabilities
                        
                        
                        271,068
                        
                        
                        
                        320,306COMMITMENTS
      AND CONTINGENCIESSTOCKHOLDER’S
      EQUITYCommon
      stock, $.01 par value--20,000 sharesauthorized;
      100 shares issued and outstanding
                        
                        
                        -
                        
                        
                        
                        -Additional
      paid-in-capital
                        
                        
                        200,046
                        
                        
                        
                        199,733Accumulated
      deficit
                        
                        
                        (43,466
                        )
                        
                        
                        (95,723
                        )Total
      stockholder’s equity
                        
                        
                        156,580
                        
                        
                        
                        104,010TOTAL
                        
                        $
                        467,271
                        
                        
                        $
                        461,890See
      notes to consolidated financial statements.
                        
                        
                        
                        
                        
                        (concluded)


F-3





EPL
      INTERMEDIATE, INC.(A
      Wholly Owned Subsidiary of El Pollo Loco Holdings,
Inc.)CONSOLIDATED
      STATEMENTS OF OPERATIONS(Amounts in
  thousands)




Year
      EndedDecember
      26,
                                
                                
                                December
      31,
                                
                                
                                December
      30,2007
                                
                                
                                2008
                                
                                
                                2009OPERATING
      REVENUE:Restaurant
      revenue
                                
                                $
                                259,987
                                
                                
                                $
                                278,343
                                
                                
                                $
                                258,904Franchise
      revenue
                                
                                
                                19,038
                                
                                
                                
                                20,587
                                
                                
                                
                                18,790Total
      operating revenue
                                
                                
                                279,025
                                
                                
                                
                                298,930
                                
                                
                                
                                277,694OPERATING
      EXPENSES:Product
      cost
                                
                                
                                81,233
                                
                                
                                
                                89,442
                                
                                
                                
                                83,391Payroll
      and benefits
                                
                                
                                67,545
                                
                                
                                
                                73,139
                                
                                
                                
                                68,806Depreciation
      and amortization
                                
                                
                                11,947
                                
                                
                                
                                13,007
                                
                                
                                
                                11,359Other
      operating expenses
                                
                                
                                90,074
                                
                                
                                
                                106,304
                                
                                
                                
                                100,759Impairment
      of intangible assets
                                
                                
                                -
                                
                                
                                
                                42,093
                                
                                
                                
                                17,430Total
      operating expenses
                                
                                
                                250,799
                                
                                
                                
                                323,985
                                
                                
                                
                                281,745OPERATING
      INCOME (LOSS)
                                
                                
                                28,226
                                
                                
                                
                                (25,055)
                                
                                
                                
                                (4,051
                                )INTEREST
      EXPENSE--Net of interest incomeof
      $384, $260 and $9 for the years endedDecember
      26, 2007, December 31, 2008and
      December 30, 2009 respectively
                                
                                
                                29,167
                                
                                
                                
                                26,003
                                
                                
                                
                                32,590OTHER
      EXPENSE
                                
                                
                                -
                                
                                
                                
                                2,043
                                
                                
                                
                                443OTHER
      INCOME
                                
                                
                                -
                                
                                
                                
                                (1,570)
                                
                                
                                
                                (452
                                )LOSS
      BEFORE PROVISIONFOR
      INCOME TAXES
                                
                                
                                (941)
                                
                                
                                
                                (51,531
                                )
                                
                                
                                (36,632
                                )PROVISION
      (BENEFIT) FOR INCOME TAXES
                                
                                
                                3,093
                                
                                
                                
                                (12,050)
                                
                                
                                
                                15,625NET
      LOSS
                                
                                $
                                (4,034)
                                
                                
                                $
                                (39,481
                                )
                                
                                $
                                (52,257
                                )See
      notes to consolidated financial statements.


F-4





EPL
      INTERMEDIATE, INC.(A
      Wholly Owned Subsidiary of El Pollo Loco Holdings,
Inc.)CONSOLIDATED
      STATEMENT OF STOCKHOLDER’S EQUITY(Amounts in thousands, except share
      data)




RetainedAdditional
                    
                    
                    EarningsCommon
                    
                    
                    
                    
                    
                    Paid-in
                    
                    
                    (AccumulatedShares
                    
                    
                    Amount
                    
                    
                    Capital
                    
                    
                    Deficit)
                    
                    
                    TotalBALANCE,
      DECEMBER 27, 2006
                    
                    
                    100
                    
                    
                    
                    -
                    
                    
                    
                    172,665
                    
                    
                    
                    49
                    
                    
                    
                    172,714Stock-based
      compensation
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    754
                    
                    
                    
                    
                    
                    
                    
                    754Tax
      benefit from exercise / cancellation of stock options
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (69
                    )
                    
                    
                    
                    
                    
                    
                    (69
                    )Repurchase
      of common stock
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (54
                    )
                    
                    
                    
                    
                    
                    
                    (54
                    )Capital
      contribution
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    3,000
                    
                    
                    
                    
                    
                    
                    
                    3,000Net
      loss
                    
                    
                    
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (4,034
                    )
                    
                    
                    (4,034
                    )BALANCE,
      DECEMBER 26, 2007
                    
                    
                    100
                    
                    
                    
                    -
                    
                    
                    
                    176,296
                    
                    
                    
                    (3,985
                    )
                    
                    
                    172,311Stock-based
      compensation
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    768
                    
                    
                    
                    
                    
                    
                    
                    768Repurchase
      of common stock
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (78
                    )
                    
                    
                    
                    
                    
                    
                    (78
                    )Tax
      benefit from exercise / cancellation of stock options
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    68
                    
                    
                    
                    
                    
                    
                    
                    68Proceeds
      from issuance of common stock
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    50
                    
                    
                    
                    
                    
                    
                    
                    50Capital
      contribution
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    22,942
                    
                    
                    
                    
                    
                    
                    
                    22,942Net
      loss
                    
                    
                    
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (39,481
                    )
                    
                    
                    (39,481
                    )BALANCE,
      DECEMBER 31, 2008
                    
                    
                    100
                    
                    
                    
                    -
                    
                    
                    
                    200,046
                    
                    
                    
                    (43,466
                    )
                    
                    
                    156,580Stock-based
      compensation
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    568
                    
                    
                    
                    
                    
                    
                    
                    568Repurchase
      of common stock
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (881
                    )
                    
                    
                    
                    
                    
                    
                    (881
                    )Net
      loss
                    
                    
                    
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (52,257
                    )
                    
                    
                    (52,257
                    )BALANCE,
      DECEMBER 30, 2009
                    
                    
                    100
                    
                    
                    
                    -
                    
                    
                    
                    199,733
                    
                    
                    
                    (95,723
                    )
                    
                    
                    104,010See
      notes to consolidated financial statements.


F-5





EPL
      INTERMEDIATE, INC.(A
      Wholly Owned Subsidiary of El Pollo Loco Holdings,
Inc.)CONSOLIDATED
      STATEMENTS OF CASH FLOWS(Amounts in
  thousands)




Year EndedDecember
      26,
                      
                      
                      December
      31,
                      
                      
                      December
      30,2007
                      
                      
                      2008
                      
                      
                      2009CASH
      FLOWS FROM OPERATINGACTIVITIES:Net
      loss
                      
                      $
                      (4,034
                      )
                      
                      $
                      (39,481
                      )
                      
                      $
                      (52,257
                      )Adjustments
      to reconcile net loss to netcash
      provided by operating activities:Depreciation
      and amortization
                      
                      
                      11,947
                      
                      
                      
                      13,007
                      
                      
                      
                      11,359Stock-based
      compensation expense
                      
                      
                      754
                      
                      
                      
                      768
                      
                      
                      
                      568Interest
      accretion
                      
                      
                      4,152
                      
                      
                      
                      3,773
                      
                      
                      
                      4,088(Gain) loss
      on disposal of assets
                      
                      
                      2,558
                      
                      
                      
                      (538
                      )
                      
                      
                      174Gain
      on repurchase of bonds
                      
                      
                      -
                      
                      
                      
                      (
      1,570
                      )
                      
                      
                      (452
                      )Asset
      impairment
                      
                      
                      -
                      
                      
                      
                      1,919
                      
                      
                      
                      4,156Impairment
      of intangible assets
                      
                      
                      -
                      
                      
                      
                      42,093
                      
                      
                      
                      17,430Amortization
      of deferred financing costs
                      
                      
                      1,391
                      
                      
                      
                      1,355
                      
                      
                      
                      3,480Amortization
      of favorable / unfavorable leases
                      
                      
                      (469
                      )
                      
                      
                      (172
                      )
                      
                      
                      (203
                      )Deferred
      income taxes
                      
                      
                      2,990
                      
                      
                      
                      (12,111
                      )
                      
                      
                      15,547Excess
      tax benefits related to exercise / cancellation of stock
      options
                      
                      
                      (69)
                      
                      
                      
                      (68
                      )
                      
                      
                      -Litigation
      settlements-net
                      
                      
                      -
                      
                      
                      
                      10,942
                      
                      
                      
                      6,220Change
      in fair value of interest rate swap
                      
                      
                      -
                      
                      
                      
                      2,049
                      
                      
                      
                      443Changes
      in operating assets and liabilities:Accounts
      and other receivables—net
                      
                      
                      (67
                      )
                      
                      
                      (841
                      )
                      
                      
                      (635
                      )Inventories
                      
                      
                      (218
                      )
                      
                      
                      22
                      
                      
                      
                      150Prepaid
      expenses and other current assets
                      
                      
                      161
                      
                      
                      
                      (966
                      )
                      
                      
                      (623
                      )Income
      taxes receivable / payable
                      
                      
                      170
                      
                      
                      
                      (145
                      )
                      
                      
                      59Other
      assets
                      
                      
                      (230
                      )
                      
                      
                      1,241
                      
                      
                      
                      (214
                      )Accounts
      payable
                      
                      
                      3,051
                      
                      
                      
                      (226
                      )
                      
                      
                      (1,761
                      )Accrued
      salaries and vacation
                      
                      
                      162
                      
                      
                      
                      (176
                      )
                      
                      
                      814Accrued
      insurance
                      
                      
                      (2,457
                      )
                      
                      
                      311
                      
                      
                      
                      (178
                      )Other
      accrued expenses and current and noncurrent liabilities
                      
                      
                      3,337
                      
                      
                      
                      2,524
                      
                      
                      
                      210Net
      cash provided by operating activities
                      
                      
                      23,129
                      
                      
                      
                      23,710
                      
                      
                      
                      8,375CASH
      FLOW FROM INVESTINGACTIVITIES:Proceeds
      from asset disposition
                      
                      
                      8,035
                      
                      
                      
                      1,080
                      
                      
                      
                      -Purchase
      of franchise restaurants
                      
                      
                      (8,358
                      )
                      
                      
                      -
                      
                      
                      
                      (1,720
                      )Purchase
      of property
                      
                      
                      (20,747
                      )
                      
                      
                      (17,455
                      )
                      
                      
                      (7,100
                      )Restricted
      cash
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (131
                      )Net
      cash used in investing activities
                      
                      
                      (21,070
                      )
                      
                      
                      (16,375
                      )
                      
                      
                      (8,951
                      )CASH
      FLOWS FROM FINANCINGACTIVITIES:Proceeds
      from issuance of common stock
                      
                      
                      -
                      
                      
                      
                      50
                      
                      
                      
                      -Repurchase
      of common stock
                      
                      
                      (54
                      )
                      
                      
                      (78
                      )
                      
                      
                      (881
                      )Excess
      tax benefits related to exercise / cancellation of stock
      options
                      
                      
                      69
                      
                      
                      
                      68
                      
                      
                      
                      -Capital
      contribution
                      
                      
                      3,000
                      
                      
                      
                      12,000
                      
                      
                      
                      -Proceeds
      from borrowings
                      
                      
                      17,000
                      
                      
                      
                      9,000
                      
                      
                      
                      133,850Payment
      of obligations under capital leases
                      
                      
                      (1,252
                      )
                      
                      
                      (1,044
                      )
                      
                      
                      (601
                      )Payments
      on debt
                      
                      
                      (19,763
                      )
                      
                      
                      (8,600
                      )
                      
                      
                      (4,934
                      )Payment
      related to termination of interest rate  swap
      agreement
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (2,280
                      )Repurchase
      of notes
                      
                      
                      -
                      
                      
                      
                      (21,496
                      )
                      
                      
                      (105,139
                      )Deferred
      financing costs
                      
                      
                      (173
                      )
                      
                      
                      -
                      
                      
                      
                      (9,238
                      )Net
      cash (used in) provided  by financing activities
                      
                      
                      (1,173
                      )
                      
                      
                      (10,100
                      )
                      
                      
                      10,777See
      notes to consolidated financial statements.
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (continued)


F-6





EPL
      INTERMEDIATE, INC.(A
      Wholly Owned Subsidiary of El Pollo Loco Holdings,
Inc.)CONSOLIDATED
      STATEMENTS OF CASH FLOWS(Amounts in
  thousands)




Year EndedDecember
26,
                                        2007
                                      
                                      
                                      December 31,
                                        2008
                                      
                                      
                                      December 30,
                                        2009INCREASE
      (DECREASE) IN CASH ANDCASH
      EQUIVALENTS
                                      
                                      $
                                      886
                                      
                                      
                                      $
                                      (2,765)
                                      
                                      
                                      $
                                      10,201CASH
      AND CASH EQUIVALENTS—Beginning
      of year
                                      
                                      
                                      2,955
                                      
                                      
                                      
                                      3,841
                                      
                                      
                                      
                                      1,076CASH
      AND CASH EQUIVALENTS—End
      of year
                                      
                                      $
                                      3,841
                                      
                                      
                                      $
                                      1,076
                                      
                                      
                                      $
                                      11,277SUPPLEMENTAL
      DISCLOSURE OF CASH FLOWINFORMATION—Cash
      paid during the year for:Interest
      (net of amounts capitalized)
                                      
                                      $
                                      25,025
                                      
                                      
                                      $
                                      21,624
                                      
                                      
                                      $
                                      23,552Income
      taxes
                                      
                                      $
                                      38
                                      
                                      
                                      $
                                      165
                                      
                                      
                                      $
                                      19SUPPLEMENTAL
      SCHEDULE OF NON-CASH ACTIVITIES:Litigation
      settlement paid by Chicken Acquisition Corp. on behalf of
    theCompany,
      treated as a capital contribution
                                      
                                      $
                                      -
                                      
                                      
                                      $
                                      10,942
                                      
                                      
                                      $
                                      -Unpaid
      purchases of property and equipment
                                      
                                      $
                                      1,358
                                      
                                      
                                      $
                                      822
                                      
                                      
                                      $
                                      29





In 2009,
the Company acquired four restaurants from a franchisee for total consideration
of $1.7 million.  The Company’s allocation of the purchase price to
the fair value of the acquired assets is as follows: equipment, $0.4 million and
building and lease hold improvements, $1.3 million.





In 2007,
the Company acquired three restaurants from a franchisee for total consideration
of $8.4 million. The Company's allocation of the purchase price to the fair
value of the acquired assets is as follows: equipment, $0.1 million, favorable
lease, $0.1 million and goodwill, $8.2 million.





See notes
to consolidated financial statements.


(concluded)


F-7


EPL
INTERMEDIATE, INC.


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




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




1.
DESCRIPTION OF BUSINESS




EPL
Intermediate, Inc. (“Intermediate”) and subsidiary (collectively, the “Company”)
is a Delaware corporation headquartered in Costa Mesa, California. The Company’s
activities are conducted principally through its subsidiary, El Pollo Loco, Inc.
(“EPL”), which develops, franchises, licenses and operates quick-service
restaurants under the name El Pollo Loco®. The restaurants, which are located
principally in California but also in Arizona, Colorado, Connecticut, Georgia,
Illinois, Missouri, Nevada, New Jersey, Oregon, Texas, Utah and Virginia,
specialize in flame-grilled chicken in a wide variety of contemporary
Mexican-influenced entrees, including specialty chicken burritos, chicken
quesadillas, chicken tortilla soup, Pollo Bowls and Pollo Salads. At
December 30, 2009, the Company operated 172 (130 in the greater Los Angeles
area) and franchised 243 (138 in the greater Los Angeles area) El Pollo Loco
restaurants. The Company is a wholly owned subsidiary of El Pollo Loco Holdings,
Inc. (“Holdings”). Holdings is an indirect wholly owned subsidiary of Chicken
Acquisition Corp. ("CAC"). The Company was acquired by CAC on November 17, 2005
(the “Acquisition”).




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.  Intermediate’s guarantee of
EPL’s revolving credit facility and EPL’s 11 3/4% Senior Notes due 2012 and
2013 is full and unconditional and Intermediate has no subsidiaries other than
EPL. 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 currently has restrictions that limit distributions or
dividends to be paid by EPL to Intermediate.





2.
EQUITY INVESTMENT IN CHICKEN ACQUISITION CORPORATION




The
Company is a wholly owned indirect subsidiary of CAC, which is 99.6% owned by
Trimaran Pollo Partners, LLC (the “LLC”) (which is controlled by affiliates of
Trimaran Capital, LLC). The LLC’s only material asset is its investment in CAC.
CAC’s only material asset, other than cash from the investment described below,
is its investment in Intermediate.




On
December 26, 2007, the Company entered into a Unit Purchase Agreement with the
LLC, CAC, EPL, FS Equity Partners V, L.P. (“FSEP V”), FS Affiliates V, L.P.
(“FSA V”), Peter Starrett (“Starrett” and collectively with FSEP V and FSA V,
the “Purchasers”), and certain members of the LLC (the “Unit Purchase
Agreement”). Pursuant to the Unit Purchase Agreement, the Purchasers acquired
409,091 membership units from the LLC, for an aggregate purchase price of $45
million. The LLC contributed the proceeds of this sale to CAC in consideration
for 409,091 newly issued CAC shares. The LLC owned 1,910,753 CAC shares prior to
the transaction and 2,319,844 CAC shares after the transaction, representing
99.6% of CAC’s outstanding shares. CAC paid various fees and
expenses related to this transaction of approximately $1.8
million.  FSEP V and FSA V (the “FS Parties”) are affiliates of one of
our directors.




On
December 26, 2007, CAC made a $3 million capital contribution to EPL through
intermediary subsidiaries. On January 25, 2008, CAC made an $8 million capital
contribution to the Company. The Company used $7.8 million of these proceeds to
repurchase outstanding 14.5% senior discount notes due 2014 (see Note 15) at a
price that approximated their accreted net book value. In May of 2008, CAC made
a $4.0 million capital contribution to the Company that was used for normal
operating purposes.  On June 18, 2008 we settled the Mexico Litigation
as described in Note 21.  The settlement payment of $10.7 million plus
legal costs was paid by CAC on behalf of EPL.  This payment is
accounted for as a capital contribution by CAC to EPL.   CAC may make
future capital contributions to the Company but it is not legally obligated to
do so.





3.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES




Basis of
Presentation —The
Company uses a 52- or 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. Approximately every six or seven years a 53-week fiscal year occurs.
Fiscal 2007 and 2009, which were 52-week years, ended December 26, 2007 and
December 30, 2009, respectively. Fiscal year 2008, which ended December 31,
2008, was a 53-week fiscal year.  The accompanying consolidated
balance sheets present the Company’s financial position as of December 31,
2008 and December 30, 2009. The accompanying consolidated statements of
operations, stockholder’s equity and cash flows present the years ended December
26, 2007, December 31, 2008 and December 30, 2009.


F-8




Principles of
Consolidation —
The accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiary. All significant intercompany balances
and transactions have been eliminated in consolidation.




Correction—
Subsequent to the issuance of its December 31, 2008 consolidated financial
statements, the Company corrected the purchase price allocation related to the
acquisition of the outstanding common stock of the Company on November 17, 2005
to properly record related deferred tax liabilities.  This correction
resulted in a reduction of goodwill and deferred tax liabilities in the amount
of $2,494,000 as of December 31, 2008 from amounts previously
presented.





Cash and Cash
Equivalents — The
Company considers all highly liquid instruments with a maturity of three months
or less at the date of purchase to be cash equivalents.





Restricted cash—The Company’s
restricted cash represents cash collateral to one commercial bank for company
credit cards.





Concentration of
risk—The Company
maintains all 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.




Accounts and
Other Receivables - Net —  Accounts and
other receivables consist primarily of royalties, advertising and sublease rent
and related amounts receivable from franchisees which are due on a monthly basis
that may differ from the Company’s month-end dates as well as credit card
receivables and a litigated insurance claim of $4.5 million that was collected
on February 2, 2010.





Inventories
— Inventories consist
principally of food, beverages and paper supplies and are valued at the lower of
average cost or market.




Property
Owned — Net — Property is stated at cost
and is depreciated using the straight-line method over the estimated useful
lives of the assets. Leasehold improvements and property held under capital
leases are amortized over the shorter of their estimated useful lives or the
remaining lease terms. For leases with renewal periods at the Company’s option,
the Company generally uses the original lease term, excluding the option
periods, to determine estimated useful lives; if failure to exercise a renewal
option imposes an economic penalty on the Company, such that management
determines at the inception of the lease that renewal is reasonably assured, the
Company includes the renewal option period in the determination of appropriate
estimated useful lives.




The
estimated useful service lives are as follows:




Buildings
            
            20
      yearsLand improvements
            
            3-30 yearsBuilding improvements
            
            3-10
      yearsRestaurant equipment
            
            3-10
      yearsOther
      equipment
            
            2-10
      yearsLeasehold improvements
            
            Estimated useful life limited by the lease term




The
Company capitalizes certain costs in conjunction with site selection that relate
to specific sites for planned future restaurants. The Company also capitalizes
certain costs, including interest, in conjunction with constructing new
restaurants. These costs are included in property and amortized over the shorter
of the life of the related buildings and leasehold improvements or the lease
term. Costs related to abandoned sites and other site selection costs that
cannot be identified with specific restaurants are charged to operations. The
Company capitalized $4,000, $0 and $0 of internal costs related to site
selection and construction activities during the years ended December 26, 2007,
December 31, 2008 and December 30, 2009, respectively. The Company also
capitalized $252,000, $205,000 and $35,000, of interest expense during the years
ended December 26, 2007, December 31, 2008 and December 30, 2009,
respectively.




Goodwill and
Other Intangible Assets—Net — Intangible assets consist
primarily of goodwill and the value allocated to the Company’s trademarks,
franchise network and favorable and unfavorable leasehold interests. Goodwill
represents the excess of cost over fair value of net identified assets acquired
in business combinations accounted for under the purchase method. Goodwill
resulted from the Acquisition by CAC and from the acquisition of certain
franchise locations.


F-9





In
accordance with Accounting Standards Codification ("ASC") 350
“Intangibles – Goodwill and Other” the Company does not amortize its goodwill
and certain intangible assets with an indefinite life, including domestic
trademarks. The Company performs its impairment test annually at its fiscal year
end, or more frequently if impairment indicators arise. No impairment was
recorded in 2007. In fiscal 2008, we recorded a non-cash impairment of $24.5
million for goodwill and $17.6 million for domestic trademarks.  In
fiscal 2009, we recorded a non-cash full impairment of $6.1 million for our
franchise network and recorded a non-cash impairment of domestic trademarks of
$11.3 million.





Intangible
assets and liabilities with a definite life are amortized using the
straight-line method over their estimated useful lives as follows:





Franchise
      network
            
            17.5 yearsFavorable
      leasehold interests
            
            1 to 18 years (remaining lease term)Unfavorable
      leasehold interests
            
            1 to 20 years (remaining lease term)





Deferred
Financing Costs— Deferred financing costs are recorded at cost and
amortized using the effective interest method over the terms of the related
notes. Deferred financing costs are included in other assets and the related
amortization is reflected as a component of interest expense in the accompanying
consolidated financial statements.




Impairment of
Long-Lived Assets—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 a non-cash impairment charge of approximately $4.2 million for the year
ended December 30, 2009 for five under-performing company-operated
restaurants that will continue to be operated.    The
Company recorded a non-cash impairment charge of approximately $1.9 million for
the year ended December 31, 2008 for three under-performing
company-operated restaurants that will continue to be operated. These amounts
are included in other operating expenses on the Company’s consolidated statement
of operations. No impairment charges were recorded in 2007.




Insurance
Reserves — The
Company is responsible for workers’ compensation and health insurance claims up
to a specified aggregate stop loss amount. The Company maintains a reserve for
estimated claims, both reported and incurred but not reported, based on
historical claims experience and other assumptions.  These amounts are
included in payroll and benefits and other operating expenses on the Company’s
consolidated statement of operations.




Restaurant and
Franchise Revenue — Revenues from the operation
of Company-operated restaurants are recognized as products are delivered to
customers. Franchise revenue consists of franchise royalties, initial franchise
fees, license fees due from franchisees, IT support services and rental income
for leases and subleases to franchisees. Franchise royalties are based upon a
percentage of net sales of the franchisee and are recorded as income as such
sales are reported by the franchisees. Initial franchise and license fees are
recognized when all material obligations have been performed and conditions have
been satisfied, typically when operations have commenced. Initial franchise fees
recognized during the years ended December 26, 2007, December 31, 2008 and
December 30, 2009, totaled $1,049,000, $1,184,000 and $663,000, respectively.
Sales tax collected from the Company’s customers is recorded on a net
basis.




Advertising
Costs —
Production costs for radio and television commercials are initially capitalized
and then fully expensed when the commercials are first aired. Advertising
expense, which is a component of other operating expenses, was $10,361,000,
$11,204,000 and $10,463,000 for the years ended December 26, 2007, December 31,
2008 and December 31, 2009, respectively, and is net of $13,605,000, $15,169,000
and $14,136,000, respectively, funded by the franchisees’ advertising
fees.




Franchisees
pay a monthly fee to the Company that ranges from 4% to 5% of their restaurants’
net sales as reimbursement for advertising, public relations and promotional
services the Company provides. Fees received in advance of provided services are
included in other accrued expenses and current liabilities and were $380,000 and
$96,000 at December 31, 2008 and December 30, 2009, respectively. Pursuant
to the Company’s Franchise Disclosure Document, company-operated restaurants
contribute to the advertising fund on the same basis as franchised
restaurants.  At December 30, 2009, the Company was obligated to
spend an additional $64,000 in future periods to comply with this
requirement.




Preopening
Costs —
Preopening costs incurred in connection with the opening of new restaurants are
expensed as incurred. These amounts are included in other operating expenses on
the consolidated statement of operations.




Franchise Area
Development Fees — The Company receives area
development fees from franchisees when they execute multi-unit area development
agreements. The Company does not recognize revenue from the agreements until the
related restaurants open or in certain circumstances, the fees are applied to
satisfy other obligations of the franchisee. Unrecognized area development fees
totaled $1,355,000 and $990,000 at December 31, 2008 and December 30,
2009, respectively, and are included in other accrued expenses and current
liabilities and other noncurrent liabilities in the accompanying consolidated
balance sheets.


F-10




Operating
Leases— Rent expense for the Company’s operating leases, which generally
have escalating rentals over the term of the lease, is recorded on a
straight-line basis over the lease term, as defined in ASC 840,
“Leases”,  as amended. The lease term begins when the Company has the
right to control the use of the leased property, which is typically before rent
payments are due under the terms of the lease.  Rent expense is
included in other operating expenses on the consolidated statement of
operations. The difference between rent expense and rent paid is recorded as
deferred rent, which is included in other noncurrent liabilities in the
accompanying consolidated balance sheets, and is amortized over the term of the
lease.





Income
Taxes — Deferred
income taxes are provided for temporary differences between the bases of assets
and liabilities for financial statement purposes and income tax purposes.
Deferred income taxes are based on enacted income tax rates in effect when the
temporary differences are expected to reverse. A valuation allowance is provided
when it is more likely than not that some portion or all of the deferred income
tax asset will not be realized.





Comprehensive
Loss—For the
years ended December 30, 2009, December 31, 2008 and December 26, 2007,
there was no difference between the Company’s net loss and comprehensive
loss.





Use of
Estimates — The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and revenue and expenses during the period reported.
Actual results could materially differ from those estimates.




Fair
Value Measurement —TheCompany’s financial assets and
liabilities are measured and reported in accordance with ASC 820-10,FairValueAccounting(“ASC 820”), which
provides a common definition of fair value and establishes a framework to make
the measurement of fair value in U.S. GAAP more consistent and comparable. This
guidance also requires expanded disclosures to provide information about the
extent to which fair value is used to measure assets and liabilities, the
methods and assumptions used to measure fair value, and the effect of fair value
measures on earnings. Fair value is defined as the amount that would be received
for selling an asset or paid to transfer a liability inanorderly transaction between market
participants and requires that assets and liabilities carried at fair value be
classified and disclosed in the following three categories:
  ●
                Level 1 –Quoted prices for identical
      instruments in active markets.●
                Level
      2 –Quoted prices for similar
      instruments in active markets; quoted prices for identical or similar
      instruments in markets that are not active; and model-derived valuations
      in which all significant inputs and significant value drivers are
      observable in active markets.●
                Level
      3–Valuations derived
      from valuation techniques in which one or more significant inputs or significant
      value drivers are
unobservable.
  The
Company’s financial assets and liabilities, which include financial instruments
as defined by ASC 820 include cash and cash equivalents, accounts receivable,
accounts payable and certain accrued expenses, long-tern 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.
 The
following table summarizes the valuation of the Company’s financial instrument
by the ASC 820 fair value hierarchy as of December 31, 2008. (dollars in
thousands):
 
 Level
      1
              
              
              Level
      2
              
              
              Level
      3
              
              
              TotalLiabilities
      at fair value:Derivative
      financial instruments—2008
              
              $
              —
              
              
              $
              2,048
              
              
              $
              —
              
              
              $
              2,048


Financial
Instruments — The
recorded values of accounts receivable, accounts payable and certain accrued
expenses approximate fair values based on their short-term nature. The recorded
values of notes payable approximate fair value, as interest approximates market
rates. The recorded value of other notes payable and senior secured notes
payable approximates fair value, based on borrowing rates currently available to
the Company for loans with similar terms and remaining maturities.




Accounting for
Stock Based Compensation — The Company adopted the
provisions of ASC 718 “Compensation-Stock Compensation” previously FASB
Statement No. 123(R), Share-Based Payment on
December 29, 2005, which requires companies to expense the estimated fair
value of employee stock options and similar awards based on the grant-date fair
value of the award. The Company adopted ASC 718 using a prospective
application, which only applies to new awards and any awards that are modified
or cancelled subsequent to the date of adoption of ASC 718.




Segment
Reporting— The Company develops, franchises and operates quick-service
restaurants under the name El Pollo Loco, which provide similar products to
similar customers. The restaurants possess similar economic characteristics
resulting in similar long-term expected financial performance characteristics.
Operating segments are components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in assessing
performance. Based on its methods of internal reporting and management
structure, management determined that the Company operates in a single
reportable segment.





Recent Accounting
Changes — FASB Accounting Standards Codification


(Accounting
Standards Update (“ASU”) 2009-01)





In
June 2009, the Financial Accounting Standards Board (“FASB”) approved the
FASB Accounting Standards Codification as the single source of authoritative
nongovernmental generally accepted accounting principles (“GAAP”). All existing
accounting standard documents, such as FASB, American Institute of Certified
Public Accountants, Emerging Issues Task Force and other related literature,
excluding guidance from the Securities and Exchange Commission (“SEC”), have
been superseded by the Codification. All other non-grandfathered, non-SEC
accounting literature not included in the Codification has become
nonauthoritative. The Codification did not change GAAP, but instead introduced a
new structure that combines all authoritative standards into a comprehensive,
topically organized online database. The Codification is effective for interim
or annual periods ending after September 15, 2009, and impacts the
Company’s financial statements as all future references to authoritative
accounting literature will be referenced in accordance with the Codification.
There have been no changes to the content of the Company’s financial statements
or disclosures as a result of implementing the Codification during the year
ended December 30, 2009.





As a
result of the Company’s implementation of the Codification during the year ended
December 30, 2009, previous references to new accounting standards and
literature are no longer applicable. In the current year financial statements,
the Company will provide reference to both new and old guidance to assist in
understanding the impacts of recently adopted accounting literature,
particularly for guidance adopted since the beginning of the current fiscal year
but prior to the Codification.


F-11





The
following are recent accounting standards adopted or issued that could have an
impact on the Company:





Consolidation
of Variable Interest Entities – Amended


(Included
in Accounting Standards Codification (“ASC”) 810 “Consolidation”; previously
SFAS No. 167 “Amendments to FASB Interpretation No. 46(R)”)





In June
2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation
No. 46(R),” (“SFAS No. 167”) which amends the consolidation guidance that
applies to variable interest entities under FIN 46(R). SFAS No. 167 changes
how a company determines when an entity that is insufficiently capitalized or is
not controlled through voting (or similar rights) should be consolidated. This
statement is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2009. The Company is currently
evaluating the impact, if any, the adoption of ASC 810 “Consolidation” may have
on its consolidated financial position or results of
operations.





In
October 2009, the Financial Accounting Standards Board (“FASB”) issued ASU No.
2009-13, which amends the guidance in ASC 605. ASU 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 surrounding multiple-deliverable arrangements. ASU 2009-13 will be
effective for revenue arrangements entered into for fiscal years beginning on or
after June 15, 2010. The Company is currently evaluating the impact, if any, the
adoption of ASU 2009-13 may have on its consolidated financial position or
results of operations.





In
January 2010, the FASB issued ASU 2010-06, which amends ASC 820 to add new
requirements for disclosures about transfers into and out of Levels 1 and 2 and
separate disclosures about purchases, sales, issuances, and settlements relating
to Level 3 measurements. The ASU also clarifies existing fair value disclosures
about the level of disaggregation and about inputs and valuation techniques used
to measure fair value. The ASU is effective for the first reporting period
(including interim periods) beginning after December 15, 2009, except for the
requirement to provide the Level 3 activity of purchases, sales, issuances, and
settlements on a gross basis, which will be effective for fiscal years beginning
after December 15, 2010, and for interim periods within those fiscal years. The
Company is currently evaluating the impact, if any, the adoption of ASU 2010-06
may have on its consolidated financial position or results of
operations.





4.
SALE AND ACQUISITIONS OF RESTAURANTS





On June
29, 2007, the Company acquired the assets of three previously franchised
restaurants (Las Vegas restaurants).  The purchase price of $8.4
million consisted of cash and was accounted for using the purchase method of
accounting in accordance with Statement of Financial Accounting Standards
(“SFAS”) No. 141, Business Combinations.  The Company’s allocation of
the purchase price to the fair value of the acquired assets is as
follows:  equipment, $0.1 million, favorable lease, $0.1 million, and
goodwill, $8.2 million.  Results of operations of the Las Vegas
restaurants are included in the Company’s financial statements beginning as of
the acquisition date.





In August
and September of 2007, the Company sold eight restaurants to franchisees for a
total of $7.5 million.  These restaurants had an aggregate net book
value of $1.6 million, and after a write off of goodwill of $8.8 million, which
was the proportionate share of goodwill attributable to the eight restaurants,
and a liability reduction of $0.1 million, the Company realized a $2.8 million
loss that is included in other operating expenses in the accompanying 2007
consolidated statements of operations.





On
September 24, 2009, EPL purchased four El Pollo Loco restaurants located in the
Atlanta, Georgia area previously owned and operated by an EPL franchisee, Fiesta
Brands, Inc., and related assets , and assumed various operating contracts,
including the leases, relating to the four purchased restaurants.  EPL
will continue to operate the four purchased restaurants. EPL also purchased
furniture, fixtures and equipment of five other El Pollo Loco restaurants
previously operated by Fiesta Brands, Inc. which have been closed. The purchase
price of $1.7 million consisted of cash and was accounted for using the purchase
method of accounting in accordance with Accounting Standards Codification
(“ASC”) 805-10, Business Combinations. The Company’s allocation of the purchase
price to the fair value of the acquired assets was as follows: equipment, $0.4
million and building and leasehold improvements, $1.3 million. Results of
operations of the Atlanta restaurants are included in the Company’s financial
statements beginning as of the acquisition date.  Fiesta Brands, Inc. is an
affiliate of the Company’s principal stockholders and certain Company
directors.





5.
PREPAID EXPENSES AND OTHER CURRENT ASSETS




Prepaid
expenses and other current assets consist of the following (in
thousands):


F-12





December 31,
                    2008
                  
                  
                  December 30,
                    2009Prepaid
      rent
                  
                  $
                  1,573
                  
                  
                  $
                  1,641Other
                  
                  
                  3,067
                  
                  
                  
                  3,621$
                  4,640
                  
                  
                  $
                  5,262




6.
PROPERTY




The costs
and related accumulated depreciation and amortization of major classes of
property as of December 31, 2008 and December 30, 2009 are as follows (in
thousands):




December 31,
                    2008
                  
                  
                  December 30,
                    2009Property
      owned:L  Land
                  
                  $
                  12,453
                  
                  
                  $
                  12,453B
      Buildings and improvements
                  
                  
                  63,946
                  
                  
                  
                  66,137O
      Other property and equipment
                  
                  
                  34,660
                  
                  
                  
                  35,958C
      Construction in progress
                  
                  
                  3,415
                  
                  
                  
                  2,230114,474
                  
                  
                  
                  116,778Accumulated
      depreciation and amortization
                  
                  
                  (30,153
                  )
                  
                  
                  (39,434
                  )Property
      owned—net
                  
                  $
                  84,321
                  
                  
                  $
                  77,344Property
      held under capital leases
                  
                  $
                  2,015
                  
                  
                  $
                  1,976Accumulated
      amortization
                  
                  
                  (1,283
                  )
                  
                  
                  (1,452
                  )Property
      held under capital leases—net
                  
                  $
                  732
                  
                  
                  $
                  524




Property
held under capital leases consists principally of buildings and improvements.
The total depreciation and amortization expense for property for the years ended
December 26, 2007, December 31, 2008 and December 30, 2009, was approximately
$11,195,000, $11,949,000 and $10,883,000 respectively.




7.
GOODWILL AND OTHER INTANGIBLE ASSETS AND LIABILITIES




Changes
in goodwill consist of the following (in thousands):




December 31,
                    2008
                  
                  
                  December 30,
                    2009Beginning
      balance
                  
                  $
                  274,417
                  
                  
                  $
                  274,417Accumulated
      impairment losses
                  
                  
                  -
                  
                  
                  
                  (24,493
                  )Goodwill
      impairment loss recorded during the year
                  
                  
                  (24,493
                  )
                  
                  
                  -Ending
      balance
                  
                  $
                  249,924
                  
                  
                  $
                  249,924




Other
intangible assets subject to amortization consist of the following (in
thousands):




December 31,
                    2008
                  
                  
                  December 30,
                    2009Franchise
      network—net
                  
                  $
                  6,575
                  
                  
                  $
                  -Favorable
      leasehold interest - net
                  
                  
                  2,582
                  
                  
                  
                  1,900O
      Other intangible assets—net
                  
                  $
                  9,157
                  
                  
                  $
                  1,900Unfavorable
      leasehold interest liability—net
                  
                  $
                  (4,883
                  )
                  
                  $
                  (3,998
                  )Intangible
      assets not subject to amortization: domestic trademark
                  
                  $
                  103,100
                  
                  
                  $
                  91,788


F-13


Due to
the downturn in the economy and its effect on expected future cash flows in
fiscal 2008, the Company recorded a non-cash impairment of goodwill of $24.5
million and recorded a non-cash impairment of domestic trademarks of $17.6
million in accordance with the evaluation described below.  Based on
the Company’s analysis described below, in fiscal 2009, the
Company recorded a non-cash full impairment of $6.1 million for our
franchise network and recorded a non-cash impairment of domestic trademarks of
$11.3 million.





The
evaluation of the carrying amount of other intangible assets with indefinite
lives is made annually coinciding with the Company’s fiscal year-end by
comparing the carrying amount of these assets to their estimated fair value. The
estimated fair value is generally determined on the basis of discounted future
cash flows. If the estimated fair value is less than the carrying amount of the
other intangible assets with indefinite lives, then an impairment charge is
recorded to reduce the asset to its estimated fair value.





The
impairment evaluation for goodwill is conducted annually coinciding with the
Company’s fiscal year-end using a two-step process. In the first step, the fair
value of all of the company-owned restaurants, treated as a single reporting
unit, is compared with the carrying amount of the reporting unit, including
goodwill. The estimated fair value of the reporting unit is generally determined
on the basis of discounted future cash flows or in consideration of recent
transactions involving stock sales with independent third parties. If the
estimated fair value of the reporting unit is less than the carrying amount of
the reporting unit, a second step must be completed in order to determine the
amount of the goodwill impairment that should be recorded. In the second step,
the implied fair value of the reporting unit’s goodwill is determined by
allocating the reporting unit’s fair value to all of its assets and liabilities
other than goodwill (including any unrecognized intangible assets) in a manner
similar to a purchase price allocation. The resulting implied fair value of the
goodwill that results from the application of this second step is then compared
with the carrying amount of the goodwill and an impairment charge is recorded
for the difference.




The
assumptions used in the estimate of fair value are generally consistent with the
past performance of the Company’s reporting unit and are also consistent with
the projections and assumptions that are used in current operating plans. These
assumptions are subject to change as a result of changing economic and
competitive conditions.





Amortization
expense for the franchise network was $457,000 for each of the years ended
December 26, 2007, December 31, 2008 and December 30, 2009,
respectively.





Favorable
leasehold interest represents the asset in excess of the approximate fair market
value of the leases assumed as of November 18, 2005, the date of the
Acquisition. The amount is being reduced over the approximate average life of
the leases.




Unfavorable
leasehold interest liability represents the liability in excess of the
approximate fair market value of the leases assumed as of November 18, 2005, the
date of the Acquisition. The amount is being reduced over the approximate
average life of the leases.  This amount is shown as other intangible
liabilities-net on the balance sheet.





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 December 302010
                
                $
                (327
                )2011
                
                
                (290
                )2012
                
                
                (275
                )2013
                
                
                (213
                )2014
                
                
                (227
                )





8.
OTHER ASSETS




Other
assets consist of the following (in thousands):




December
      31,
                    2008
                  
                  
                  December
      30,
                    2009Deferred
      financing costs - net
                  
                  $
                  5,298
                  
                  
                  $
                  10,993Other
                  
                  
                  1,012
                  
                  
                  
                  1,207$
                  6,310
                  
                  
                  $
                  12,200




Amortization
expense for deferred financing costs was $1,391,000, $1,356,000 and $3,480,000
for the years ended December 26, 2007, December 31, 2008 and December 30, 2009,
respectively.


F-14





9.
LEASES




The
Company’s operations utilize property, facilities, equipment and vehicles owned
by the Company or leased from others. Buildings and facilities leased from
others are primarily for restaurants and support facilities. Restaurants are
operated under lease arrangements that generally provide for a fixed base rent
and, in some instances, contingent rent based on a percentage of gross operating
profit or gross revenues in excess of a defined amount. Initial terms of land
and restaurant building leases generally are not less than 20 years, exclusive
of options to renew. Leases of equipment primarily consist of restaurant
equipment, computer systems and vehicles. The Company subleases facilities to
certain franchisees and other non-related parties which are recorded on a
straight-line basis.





Information
regarding the Company’s future lease obligations at December 30, 2009 is as
follows (in thousands):




Capital Leases
                  
                  
                  Operating LeasesYear Ending December 30
                  
                  Minimum
                    Lease
                    Payments
                  
                  
                  Minimum
                    Sublease
                    Rentals
                  
                  
                  Minimum
                    Lease
                    Payments
                  
                  
                  Minimum
                    Sublease
                    Rentals2010
                  
                  $
                  627
                  
                  
                  $
                  225
                  
                  
                  $
                  17,952
                  
                  
                  $
                  1,6802011
                  
                  
                  457
                  
                  
                  
                  115
                  
                  
                  
                  16,624
                  
                  
                  
                  1,4622012
                  
                  
                  436
                  
                  
                  
                  115
                  
                  
                  
                  15,637
                  
                  
                  
                  1,2052013
                  
                  
                  417
                  
                  
                  
                  115
                  
                  
                  
                  13,749
                  
                  
                  
                  7862014
                  
                  
                  416
                  
                  
                  
                  115
                  
                  
                  
                  11,687
                  
                  
                  
                  316Subsequent
      years
                  
                  
                  1,198
                  
                  
                  
                  170
                  
                  
                  
                  83,673
                  
                  
                  
                  550Total
                  
                  
                  3,551
                  
                  
                  $
                  855
                  
                  
                  $
                  159,322
                  
                  
                  $
                  5,999Less
      imputed interest
                  
                  
                  (1,447
                  )Present
      value of capital lease obligations
                  
                  
                  2,104Less
      current maturities
                  
                  
                  (341
                  )Noncurrent
      portion
                  
                  $
                  1,763




Net rent
expense for the years ended December 26, 2007, December 31, 2008 and December
30, 2009 is as follows (in thousands):




Year EndedDecember 26,
                      2007
                    
                    
                    December 31,
                      2008
                    
                    
                    December 30,
                      2009Base
      rent
                    
                    $
                    17,246
                    
                    
                    $
                    18,159
                    
                    
                    $
                    18,938Contingent
      rent
                    
                    
                    630
                    
                    
                    
                    683
                    
                    
                    
                    473Less
      sublease income
                    
                    
                    (4,316
                    )
                    
                    
                    (4,155
                    )
                    
                    
                    (3,779
                    )Net
      rent expense
                    
                    $
                    13,560
                    
                    
                    $
                    14,687
                    
                    
                    $
                    15,632




Base rent
and contingent rent are included in other operating expenses, while sublease
income is included in franchise revenue in the accompanying consolidated
statements of operations. Sublease income includes contingent rental income of
$2,060,000, $2,071,000 and $1,596,000 for the years ended December 26, 2007,
December 31, 2008 and December 30, 2009, respectively.




In
addition to the sublease income described above, the Company is a lessor for
certain property, facilities and equipment owned by the Company and leased to
others, principally franchisees, under noncancelable leases with initial terms
ranging from three to nine years. The lease agreements generally provide for a
fixed base rent and, in some instances, contingent rent based on a percentage of
gross operating profit or gross revenues. Total rental income, included in
franchise revenue in the accompanying consolidated statements of operations, for
leased property was $414,000, $360,000 and $308,000 for the years ended December
26, 2007, December 31, 2008 and December 30, 2009, respectively.




Minimum
future rental income for company-owned properties under noncancelable operating
leases, which is recorded on a straight-line basis, in effect as of December 30,
2009 is as follows (in thousands):


F-15





Year Ending December 302010
                    
                    $
                    2092011
                    
                    
                    1662012
                    
                    
                    1662013
                    
                    
                    1662014
                    
                    
                    82Thereafter
                    
                    
                    98Total
      future minimum rental income
                    
                    $
                    887





10.
SENIOR SECURED NOTES (2009 Notes)




In
December 2003, EPL issued notes, consisting of $110.0 million of senior
secured notes (the “2009 Notes”) accruing interest at 9.25% per annum due
December 2009. In May of 2009, the Company repurchased, at par, the remaining
outstanding $250,000 balance of these 2009 Notes.





11.
SENIOR SECURED NOTES (2012 Notes)




On May
22, 2009, EPL issued $132,500,000 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 $129,850,000
before expenses and fees.  At December 30, 2009, the Company had
$130.4 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
December 30, 2009, EPL does not meet the fixed charge coverage ratio.
Accordingly, EPL is not permitted to incur additional indebtedness. A failure to
comply with the covenants affects only EPL's ability to incur additional
indebtedness and does not constitute a default under the 2012
notes.




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 balance sheets, and the
related amortization is reflected as a component of interest expense in the
accompanying consolidated statement of operations. The Company used the net
proceeds from the 2012 Notes to repay the credit facility with Merrill
Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated and Bank
of America, N.A. (see Note 13) and its 2009 Notes (see Note 10), 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.





12.
SENIOR UNSECURED NOTES PAYABLE (2013 Notes)




EPL has
outstanding 2013 notes, consisting of $106.3 million aggregate principal amount
of 113⁄4% senior notes due 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 the discretion of the issuer, after
November 15, 2009. 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, among other
items.





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 balance
sheets, and the related amortization is reflected as a component of interest
expense in the accompanying consolidated financial statements. The Company used
the proceeds from the 2013 Notes to purchase substantially all of the
outstanding 2009 Notes (Note 10).




The
Company purchased $15.9 million in principal amount of these Notes at a price of
$13.6 million at various times in 2008.  The net purchase price was
86% of the principal amount of such notes and resulted in a net gain of $1.6
million which is included in other income in the consolidated statement of
operations.  The gain of $1.6 million is net of the write-off of
prorated deferred finance costs of $0.6 million.


F-16





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 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.





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 (see
Note 11) have restrictions that limit distributions or dividends that may be
paid by EPL to Intermediate. Conditions that would allow for distributions or
dividends to be made include compliance with a fixed charge coverage ratio test
(as defined in the applicable indentures) and cash received from the proceeds of
new equity contributions. As of December 30, 2009, EPL is restricted from
incurring additional indebtedness, as it does not currently meet the 2.0 to
1 fixed charge coverage ratio required under its 2012 and 2013 Notes. This
restriction does not apply to the existing loan availability of $6.2 million
under the revolving line of credit. There are also some allowed distributions,
payments and dividends for other specific events. Distributions, dividends or
investments would also be limited to 50% of consolidated net income under
certain circumstances.




13.
NOTES PAYABLE TO MERRILL LYNCH, BANK OF AMERICA, ET AL AND REVOLVING CREDIT
FACILITY




On
November 18, 2005, EPL entered into a senior secured credit facility with
Intermediate, as parent guarantor, Merrill Lynch Capital Corporation, as
administrative agent, the other agents identified therein, Merrill Lynch &
Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated and Bank of America,
N.A., as lead arrangers and book managers, and a syndicate of financial
institutions and institutional lenders. The credit facility provided for a
$104.5 million term loan and $25.0 million in revolving availability. The
Company repaid the credit facility in full in May 2009 with the proceeds of the
2012 Notes and replaced the revolving loan with the new credit facility
described in Note 14.




The
credit facility bore interest, payable quarterly, at a Base Rate as defined in
the credit facility or LIBOR, at EPL’s option, plus an applicable margin. The
applicable margin was based on EPL’s financial performance, as defined in the
credit facility. The applicable margin rate for the term loan remained constant
at 2.50% with respect to LIBOR and at 1.50% with respect to Base Rate. See below
for the interest rates on the portion of the term loan represented by an
interest rate swap. The credit facility was secured by a first-priority pledge
by Holdings of all of the outstanding stock of Intermediate, a first priority
pledge by Intermediate of all of EPL’s outstanding stock and a first
priority security interest in substantially all of EPL’s tangible and intangible
assets. In addition, the credit facility was guaranteed by Intermediate and
Holdings.




The
credit facility required the prepayment of the term loan in an amount equal to
50% of Excess Operating Cash Flow if, at the end of the fiscal year, the
Consolidated Leverage Ratio was less than 5.0:1.0. Excess Operating Cash Flow
was defined as an amount equal to Consolidated EBITDA minus Consolidated
Financial Obligations and other specific payments and adjustments. The Excess
Operating Cash Flow for 2008 was $9.4 million. The Company made the required
prepayment of $4.7 million in April 2009.




In the
past, to help mitigate risk, we entered into an interest rate swap agreement.
The agreement was terminated in the second quarter of 2009. The interest rate
swap agreement was intended to reduce interest rate risk associated with
variable interest rate debt. The Company had $0.2 million in expense for the
year ended December 30, 2009, related to the change in the fair value of the
interest rate swap agreement.





14.
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 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. Utilizing
the Credit Facility, $6.3 million of letters of credit were issued and
outstanding as of December 30, 2009.


F-17





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 December 30, 2009, 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.




15.
PIK NOTES (2014 Notes)





As of
December 30, 2009, 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 EPL to make dividend or other
payments to Intermediate and for Intermediate or EPL to make payments to El
Pollo Loco Holdings, Inc., the immediate parent corporation.  As of
December 30, 2009, EPL is restricted from making distributions, payments or
dividends to Intermediate above an aggregate amount  of $5 million, as
EPL does not currently meet the 2.0 to 1 fixed charge coverage ratio required
under EPL’s 2012 and 2013 Notes.  There are some allowed
distributions, payments and dividends for specific events.  In any
event, EPL is not legally required to make any type of payment to
Intermediate.  See Note 22 for condensed financial statements of
Intermediate and EPL.





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 any or all of these
notes, subject to certain provisions contained in the indenture governing these
notes.




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
consolidated statements of operations.




In
January 2008, CAC made a $8.0 million capital contribution to the
Intermediate.  In January 2008, Intermediate used $7.9 million of
these proceeds to repurchase a portion of these notes for $7.9 million, at a
price that approximated their accreted value. Intermediate wrote-off the
prorated deferred finance costs of $0.1 million which was included in other
income in the consolidated statement of operations.





16.
OTHER ACCRUED EXPENSES AND CURRENT LIABILITIES




Other
accrued expenses and current liabilities consist of the following (in
thousands):




December 31,
                    2008
                  
                  
                  December 30,
                    2009Accrued
      sales and property taxes
                  
                  $
                  3,435
                  
                  
                  $
                  2,852Other
                  
                  
                  2,761
                  
                  
                  
                  2,387$
                  6,196
                  
                  
                  $
                  5,239


F-18





17.
OTHER NONCURRENT LIABILITIES




Other
noncurrent liabilities consist of the following (in thousands):




December 31,
                    2008
                  
                  
                  December 30,
                    2009Fair
      value of interest rate swap
                  
                  $
                  2,048
                  
                  
                  $
                  -Deferred
      rent
                  
                  
                  6,314
                  
                  
                  
                  7,311Workers’
      compensation reserve
                  
                  
                  2,674
                  
                  
                  
                  1,816Other
                  
                  
                  1,796
                  
                  
                  
                  1,546$
                  12,832
                  
                  
                  $
                  10,673




The
Company leases its facilities under various operating lease agreements. Certain
provisions of these leases provide for graduated rent payments and landlord
contributions. The Company recognizes rent expense on a straight-line basis over
the lease term. The cumulative difference between such rent expense and actual
payments to date is reflected as deferred rent. Landlord contributions are also
included in deferred rent and are amortized as a reduction of rent expense
ratably over the lease term.





18. INCOME TAXES




The
provision (benefit) for income taxes is based on the following components (in
thousands):





Year EndedDecember 26,
                    
                    
                    December 31,
                    
                    
                    December 30,2007
                    
                    
                    2008
                    
                    
                    2009Current
      income taxes:Federal
                    
                    $
                    12
                    
                    
                    $
                    14
                    
                    
                    $
                    -State
                    
                    
                    23
                    
                    
                    
                    47
                    
                    
                    
                    7835
                    
                    
                    
                    61
                    
                    
                    
                    78Deferred
      income taxes:Federal
                    
                    
                    1,933
                    
                    
                    
                    (9,182
                    )
                    
                    
                    12,524State
                    
                    
                    1,125
                    
                    
                    
                    (2,929
                    )
                    
                    
                    3,0233,058
                    
                    
                    
                    (12,111
                    )
                    
                    
                    15,547$
                    3,093
                    
                    
                    $
                    (12,050
                    )
                    
                    $
                    15,625





A
reconciliation of the provision (benefit) for income taxes to the amount of
income tax expense that would result from applying the federal statutory rate to
income before provision (benefit) for income taxes is as follows (in
thousands):


F-19


Year EndedDecember 26,
                    
                    
                    December 31,
                    
                    
                    December 30,2007
                    
                    
                    2008
                    
                    
                    2009Provision
      (benefit) for income taxes at statutory rate
                    
                    $
                    (329
                    )
                    
                    $
                    (18,035
                    )
                    
                    $
                    (12,821
                    )State
      income taxes-net of federal income tax benefit
                    
                    
                    746
                    
                    
                    
                    (1,851
                    )
                    
                    
                    (2,015
                    )Non-deductible
      goodwill
                    
                    
                    2,785
                    
                    
                    
                    7,738Valuation
      allowance
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    30,470Other
                    
                    
                    (109
                    )
                    
                    
                    98
                    
                    
                    
                    (9
                    )$
                    3,093
                    
                    
                    $
                    (12,050
                    )
                    
                    $
                    15,625




Deferred
income tax assets and liabilities are recorded for differences between the
financial statement and tax basis of the assets and liabilities that will result
in taxable or deductible amounts in the future based on enacted laws and rates
applicable to the periods in which the differences are expected to affect
taxable income.  Valuation allowances are established when necessary
to reduce deferred tax assets to the amount expected to be
realized.





The
Company’s deferred income tax assets and liabilities consist of the following
(in thousands):





December
      31,
                  
                  
                  December
      30,2008
                  
                  
                  2009Capital
      leases
                  
                  $
                  845
                  
                  
                  $
                  671Accrued
      vacation
                  
                  
                  727
                  
                  
                  
                  646Accrued
      legal
                  
                  
                  -
                  
                  
                  
                  4,628Deferred
      rent
                  
                  
                  5,687
                  
                  
                  
                  4,033Accrued
      workers' compensation
                  
                  
                  1,516
                  
                  
                  
                  973Enterprise
      zone and other credits
                  
                  
                  505
                  
                  
                  
                  605State
      taxes
                  
                  
                  17
                  
                  
                  
                  9Net
      operating losses
                  
                  
                  14,196
                  
                  
                  
                  18,135Interest
      expense
                  
                  
                  880
                  
                  
                  
                  -Other
                  
                  
                  5,037
                  
                  
                  
                  6,183Deferred
      income tax assets
                  
                  
                  29,410
                  
                  
                  
                  35,883Less
      valuation allowance
                  
                  
                  -
                  
                  
                  
                  (30,470
                  )Net
      deferred tax assets
                  
                  
                  29,410
                  
                  
                  
                  5,413Goodwill
                  
                  
                  (1,610
                  )
                  
                  
                  (2,607
                  )Trademark
                  
                  
                  (40,471
                  )
                  
                  
                  (36,046
                  )Prepaid
      expense
                  
                  
                  (1,353
                  )
                  
                  
                  (1,422
                  )Basis
      difference in fixed assets
                  
                  
                  (5,302
                  )
                  
                  
                  (2,189
                  )Other
                  
                  
                  (2,576
                  )
                  
                  
                  (598
                  )Deferred
      income tax liabilities
                  
                  
                  (51,312
                  )
                  
                  
                  (42,862
                  )Net
      deferred income tax liability
                  
                  
                  (21,902
                  )
                  
                  
                  (37,449
                  )


F-20





The
Company has evaluated the available evidence supporting the realization of its
gross deferred tax assets, including the amount and timing of future taxable
income, and has determined it is more likely than not that the assets will not
be realized.  Due to uncertainties surrounding the realizability of
the deferred tax assets, the Company recorded a full valuation allowance against
its definite lived net deferred tax assets during the year ended December
30, 2009.  The tax effect of recording a valuation allowance
resulted in tax expense for the year ended December 30, 2009 of $30.5
million recognized in the consolidated statements of
operations.




As of
December 30, 2009, the Company has federal and state net operating loss
carryforwards of approximately $40 million and $55 million, respectively, which
expire beginning in 2025 and 2014, respectively. The Company also has enterprise
zone credits and alternative minimum tax credits of approximately $351,000 and
$255,000, respectively, which carryforward indefinitely.




The
utilization of net operating loss carryforwards may be subject to limitations
under provision of the Internal Revenue Code Section 382 and similar state
provisions.




On
December 28, 2006, the Company adopted the provisions of FIN 48, Accounting for Uncertainty in Income
Taxes, now referred to as ASC 740 “Income Taxes”, which clarifies the
accounting for uncertain tax positions. ASC 740 requires that the Company
recognize the impact of a tax position in  the consolidated financial
statemenst if the position is more likely than not of being sustained upon
examination and on the technical merits of the position. The impact of the
adoption of ASC 740 was immaterial to the Company’s consolidated financial
statements.  As of December 30, 2009, the Company has no material
unrecognized tax benefits.





A
reconciliation of the beginning and ending balance of unrecognized tax benefits
is as follows:




Balance
      at December 27, 2006
                    
                    $
                    -Additions
      based on tax positions related to the current year
                    
                    
                    2,098,000Balance
      at December 26, 2007
                    
                    $
                    2,098,000Gross
      decreases – tax positions in prior period
                    
                    
                    (1,356,000
                    )Balance
      at December 31, 2008
                    
                    $
                    742,000Gross
      decreases - tax positions in prior period
                    
                    
                    (742,000
                    )Balance
      at December 30, 2009
                    
                    $
                    -





The
Company does not anticipate any material change in the total amount of
unrecognized tax benefits to occur within the next twelve months.





ASC 740
requires the Company to accrue interest and penalties where there is an
underpayment of taxes based on the Company’s best estimate of the amount
ultimately to be paid. The Company’s policy is to recognize interest accrued
related to unrecognized tax benefits and penalties as income tax expense. The
Company has no uncertain tax positions as of December 30, 2009, consequently no
interest or penalties have been accrued by the Company.





The
Company is subject to taxation in the U.S. and various state jurisdictions. The
Company is no longer subject to U.S. examination for years before 2005, and
years before 2004 by state taxing authorities.




19.
EMPLOYEE BENEFIT PLANS




The
Company sponsors a defined contribution employee benefit plan that permits its
employees, subject to certain eligibility requirements, to contribute up to 25%
of their qualified compensation to the plan. The Company matches 100% of the
employees’ contributions of the first 3% of the employees’ annual qualified
compensation, and 50% of the employees’ contributions of the next 2% of the
employees’ annual qualified compensation. The Company’s matching contribution
immediately vests 100%. The Company’s contributions to the plan for the years
ended December 26, 2007, December 31, 2008 and December 30, 2009, were
approximately $416,000, $551,000 and $467,000, respectively.





20.
STOCK-BASED COMPENSATION




As of
December 26, 2007, December 31, 2008 and December 30, 2009, options to purchase
304,287, 307,556 and 289,217 shares, respectively, of common stock of CAC were
outstanding. Included in that amount are 65,740 options that are fully vested;
the remaining options partially vest upon the Company’s attaining annual
financial goals, with the remaining unvested portion vesting on the sixth or
seventh anniversary of the grant date, and vest 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 at fair value on the date of grant.


F-21




Changes
in stock options for the years ended December 26, 2007, December 31, 2008 and
December 30, 2009 are as follows:




Shares
                  
                  
                  Weighted-
                    Average
                    Exercise Price
                  
                  
                  Weighted-
                    Average
                    Remaining
                    Contractual
                    Life
                    (in Years)
                  
                  
                  
                  Aggregate
                    Intrinsic
                    ValueO
      Outstanding—December 27, 2006
                  
                  
                  302,772
                  
                  
                  $
                  66.58G
      Grants (weighted-average fair value of $49.95 per share)
                  
                  
                  22,246
                  
                  
                  $
                  113.29E
      Exercised
                  
                  
                  (709
                  )
                  
                  $
                  10.39
                  
                  
                  
                  
                  
                  $
                  66,426C
      Canceled
                  
                  
                  (20,022
                  )
                  
                  $
                  88.93O
      Outstanding—December 26, 2007
                  
                  
                  304,287
                  
                  
                  $
                  68.65G
      Grants (weighted-average fair value of $42.14 per share)
                  
                  
                  4,449
                  
                  
                  $
                  109.07E
      Exercised
                  
                  
                  (1,180
                  )
                  
                  $
                  20.60
                  
                  
                  
                  
                  
                  $
                  107,286C
      Canceled
                  
                  
                  -O
      Outstanding—December 31, 2008
                  
                  
                  307,556
                  
                  
                  $
                  69.42G
      Grants (weighted-average fair value of $28.29 per share)
                  
                  
                  15,573
                  
                  
                  $
                  68.00E
      Exercised
                  
                  
                  (13,911
                  )
                  
                  $
                  5.97
                  
                  
                  
                  
                  
                  
                  $
                  881,370C
      Canceled
                  
                  
                  (20,001
                  )
                  
                  $
                  86.43O
      Outstanding—December 30, 2009
                  
                  
                  289,217
                  
                  
                  $
                  71.22
                  
                  
                  
                  5.5
                  
                  
                  $
                  2,425,806V
      Vested and expected to vest in the future - December 30,
    2009
                  
                  
                  285,688
                  
                  
                  $
                  71.22
                  
                  
                  
                  5.5
                  
                  
                  $
                  2,425,806Exercisable
      - December 30, 2009
                  
                  
                  65,740
                  
                  
                  $
                  9.10
                  
                  
                  
                  2.0
                  
                  
                  $
                  2,425,806





Outstanding
stock options at December 30, 2009 are summarized as follows:




Range of Exercise
                        Prices
                      
                      Number
                        Outstanding
                      
                      
                      Weighted-
                        Average
                        Remaining
                        Contractual
                        Life
                        (in Years)
                      
                      
                      Weighted-
                        Average
                        Exercise Price
                      
                      
                      Number
                        Exercisable
                      
                      
                      Weighted-
                        Average
                        Exercise Price$
                      2.98
                      
                      
                      6,307
                      
                      
                      
                      0.3
                      
                      
                      $
                      2.98
                      
                      
                      
                      6,307
                      
                      
                      $
                      2.98$
                      7.56
                      
                      
                      24,026
                      
                      
                      
                      1.3
                      
                      
                      $
                      7.56
                      
                      
                      
                      24,026
                      
                      
                      $
                      7.56$
                      9.68-$11.77
                      
                      
                      32,365
                      
                      
                      
                      2.7
                      
                      
                      $
                      10.68
                      
                      
                      
                      32,365
                      
                      
                      $
                      10.68$
                      15.48-$20.60
                      
                      
                      3,042
                      
                      
                      
                      5.0
                      
                      
                      $
                      17.11
                      
                      
                      
                      3,042
                      
                      
                      $
                      17.11$
                      68.00
                      
                      
                      15,573
                      
                      
                      
                      9.7
                      
                      
                      $
                      68.00
                      
                      
                      
                      —
                      
                      
                      $
                      —$
                      86.43
                      
                      
                      169,057
                      
                      
                      
                      6.0
                      
                      
                      $
                      86.43
                      
                      
                      
                      —
                      
                      
                      $
                      —$
                      108.84-$117.75
                      
                      
                      38,847
                      
                      
                      
                      7.3
                      
                      
                      $
                      111.44
                      
                      
                      
                      —
                      
                      
                      $
                      —289,217
                      
                      
                      
                      5.5
                      
                      
                      $
                      71.22
                      
                      
                      
                      65,740
                      
                      
                      $
                      9.10


F-22





The
intrinsic value is calculated as the difference between the market value as of
December 30, 2009 and the exercise price of the options outstanding and options
exercisable.




Options
are accounted for as follows:




Variable Accounting:
Options granted on December 15, 2005 provide that, in the event of a successful
completion of an initial public offering of at least $50 million before November
18, 2007, 50% of the then unvested options would have vested immediately upon
consummation of the offering. The remaining unvested options would have
automatically terminated and the optionees would have been entitled to receive
restricted stock with an aggregate economic value equal to the fair market value
(measured at the close of business of the first day of public trading) of the
shares into which the terminated unvested options were exercisable minus the
aggregate exercise price of such options. Upon a change in control of CAC, or if
the initial public offering occurs after November 18, 2007, 100% of the options
granted will vest immediately.




For
options granted on December 15, 2005 that would have been cancelled and replaced
with restricted stock upon completion of an initial public offering before
November 18, 2007, the Company used variable accounting to recognize expense
based on the change in incremental value of the award at each reporting period
until November 18, 2007. As the Company did not undertake an initial public
offering prior to November 18, 2007, the future compensation expense is
calculated based on the intrinsic value of the award as of that date.
Compensation expense of $381,000, $307,000 and $162,000 was recognized for the
years ended December 26, 2007, December 31, 2008 and December 30, 2009,
respectively, related to such options. As of December 30, 2009, the total
unamortized compensation expense related to these options was approximately $0.8
million, which will be amortized over the remaining vesting period of
approximately 3.0 years, or earlier in the event of an initial public offering
of our common stock or a change in control.




ASC 718 “Compensation-Stock
Compensation”; previously FASB Statement No. 123(R): ASC 718 requires
companies to expense the estimated fair value of employee stock options and
similar awards based on the grant-date fair value of the award. The cost is
recognized on a straight-line basis over the period during which an employee is
required to provide service in exchange for the award, usually the vesting
period. The Company adopted the provisions of ASC 718 on December 29, 2005 using
a prospective application. Under the prospective application, ASC 718 applies to
new awards and any awards that are modified or cancelled subsequent to the date
of adoption of ASC 718. Prior periods are not revised for comparative purposes.
Because the Company used the minimum value method for its pro forma disclosures
under ASC 718, options granted prior to December 29, 2005 will continue to be
accounted for in accordance with APB Opinion No. 25 unless such options are
modified, repurchased or cancelled after December 29, 2005.




In order
to meet the fair value measurement objective, the Company utilizes the
Black-Scholes option-pricing model to value compensation expense for share-based
awards granted beginning in 2006 and developed estimates of various inputs
including forfeiture rate, expected term life, expected volatility, and
risk-free interest rate. The forfeiture rate is based on historical rates and
reduces the compensation expense recognized. The expected term of options
granted is derived from the simplified method per ASC 718-10-30. The risk-free
interest rate is based on the implied yield on a U.S. Treasury constant maturity
with a remaining term equal to the expected term of the Company’s employee stock
options. Expected volatility is based on the comparative industry entity data.
The Company does not anticipate paying any cash dividends in the foreseeable
future and therefore uses an expected dividend yield of zero for option
valuation.




The
weighted-average estimated fair value of employee stock options granted during
the year ended December 30, 2009 was $28.29 per share using the Black-Scholes
model with the following weighted-average assumptions used to value the option
grants: Expected volatility of 31%; Expected term life - 7.0 years; Forfeiture
rate - 1.22%; Risk-free interest rates - 3.0%; and Expected dividends -
0%.





The
weighted-average estimated fair value of employee stock options granted during
the year ended December 31, 2008 was $42.14 per share using the Black-Scholes
model with the following weighted-average assumptions used to value the option
grants: Expected volatility of 31%; Expected term life - 7.0 years; Forfeiture
rate - 1.22%; Risk-free interest rates -3.0%; and Expected dividends -
0%.




The
weighted-average estimated fair value of employee stock options granted during
the year ended December 26, 2007 was $49.95 per share using the Black-Scholes
model with the following weighted-average assumptions used to value the option
grants: Expected volatility of 32%; Expected term life - 7.0 years; Forfeiture
rate - 1.22%; Risk-free interest rates ranged from 4.5% to 5.0%; and Expected
dividends - 0%.





During
the years ended December 26, 2007, December 31, 2008 and December 30, 2009, the
Company recognized share-based compensation expense before tax of $373,000,
$404,000 and $406,000, respectively, related to stock option grants after
December 28, 2005. These expenses were included in other operating expenses
consistent with the salary expense for the related optionees.


F-23





Upon
consummation of an initial public offering of at least $50 million or a change
in control of CAC, the Company would incur compensation expense related to the
immediate vesting of the unvested portion of certain options. The expense will
be determined by calculating the unrecognized compensation cost as of the date
of the completion of the offering or the change in control.




As of
December 30, 2009, there was total unrecognized compensation expense of $2.8
million related to unvested stock options which the Company expects to recognize
over a weighted average period of 3.5 years.





In
October 2008, the Board of Directors of CAC adopted a Restricted Stock Plan
pursuant to which up to an aggregate of 5,000 shares of CAC common stock may be
awarded to independent directors as compensation for their
services.  No restricted stock awards were granted in 2008. In 2009,
404 shares were granted. For fiscal 2009, there was not a material restricted
stock expense.





21.
COMMITMENTS AND CONTINGENCIES




Legal
Matters




On or
about April 16, 2004, former managers Haroldo Elias, Marco Ramirez and Javier
Rivera filed a purported class action lawsuit in the Superior Court of the State
of California, County of Los Angeles, against EPL on behalf of all putative
class members (former and current general managers and restaurant managers from
April 2000 to present) alleging certain violations of California labor laws,
including alleged improper classification of general managers and restaurant
managers as exempt employees. Plaintiffs’ requested remedies include
compensatory damages for unpaid wages, interest, certain statutory penalties,
disgorgement of alleged profits, punitive damages and attorneys’ fees and costs
as well as certain injunctive relief. The parties reached an agreement to settle
this matter for $8 million which was accrued for in the fourth quarter of 2009
and is included in accounts payable within the accompanying balance
sheet and  included in other operating expenses within the statement
of operations.  The Court has granted preliminary approval of the
classwide settlement and set a hearing for final approval on April 1,
2010.  We funded the settlement on January 14, 2010.




On or
about October 18, 2005, Salvador Amezcua, on behalf of himself and all others
similarly situated, filed a purported class action complaint against EPL in the
Superior Court of the State of California, County of Los Angeles. Carlos Olvera
replaced Mr. Amezcua as the named class representative on August 16, 2006. This
action alleges certain violations of California labor laws and the California
Business and Professions Code, based on, among other things, failure to pay
overtime compensation, failure to provide meal periods, unlawful deductions from
earnings and unfair competition. Plaintiffs’ requested remedies include
compensatory and punitive damages, injunctive relief, disgorgement of profits
and reasonable attorneys’ fees and costs.  This lawsuit was deemed
related to and was included as part of the Elias settlement discussed
above.




On June
22, 2006, the Company filed a complaint for declaratory relief, breach of
written contract and bad faith against Arch Specialty Insurance Company
(Arch), seeking damages and equitable relief for Arch’s refusal to carry
out the obligations of its insurance contract to defend and indemnify, among
other things, the Company in the EPL-Mexico v. EPL-USA trademark litigation
settled in June 2008. The parties agreed to settle this matter for a payment by
Arch to the Company of $4.5 million which was recorded as a receivable as of
December 30, 2009 and is included in accounts receivable within the accompanying
balance sheet and included in other operating expenses within the statement of
operations.  The basic terms of the agreement were confirmed in late
December 2009 and the settlement payment was received by us on February 2,
2010.




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 $0.9 million and have executed a Memorandum of
Understanding. This amount was accrued for as of December 30, 2009 and is
included in accounts payable within the accompanying balance sheet and included
in other operating expenses within the statement of
operations.  The Court granted preliminary approval of the settlement
on February 25, 2010, and the parties currently await a formal court order
setting the class notification deadlines as well as the hearing for final court
approval.




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 $1.5
million and have executed a Settlement Agreement. This amount was accrued for as
of December 30, 2009 and is included in accounts payable on the Company’s balance sheet
and included in other operating expenses within the statement of
operations.   The Court granted preliminary approval of the
settlement on February 25, 2010, and the parties currently await a formal court
order setting the class notification deadlines as well as the hearing for final
court approval.


F-24





On or
about February 2, 2009, Sunset & Westridge, LLC, landlord of a restaurant
site in St. George, Utah, filed suit against EPL in Superior Court for the
County of Orange seeking declaratory relief for alleged breach of a commercial
lease.  Plaintiff alleged that the Company wrongfully terminated the lease
in question, citing force majeure delays as justification for missing the
delivery date on the property.  The parties agreed to settle this matter in
November 2009 for an immaterial amount which was paid in 2009 and the matter was
dismissed on January 15, 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 and will be included in that settlement.





In
September 2008, the excess insurance carrier in the settled Mexico trademark
litigation, American International Specialty Lines Insurance Company, 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 the underlying Mexico trademark litigation.  This
lawsuit was stayed pending the outcome of the Arch litigation described above,
and is set for trial starting April 12, 2010.





We are
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 company-operated restaurants and
franchised restaurants, respectively, 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 $5.8 million.





In March
2010, EPL executed a chicken supply contract with a vendor.  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 one year remaining on
contracts with certain other vendors for chicken. The estimated obligations on
those contracts are $23.6 million.





22.
FINANCIAL INFORMATION FOR PARENT GUARANTOR AND SUBSIDIARY





The
following presents condensed consolidating financial information for the
Company, segregating: (1) EPLI , the parent which has unconditionally
guaranteed, jointly and severally the 2012 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 who also unconditionally guaranteed, jointly
and severally the 2012 Notes.  EPL is a wholly owned subsidiary of
EPLI.


F-25





For the Year Ended December 30, 2009(in
      thousands)ConsolidatedEPL
                            
                            
                            Intermediate
                            
                            
                            Subtotal
                            
                            
                            Eliminations
                            
                            
                            TotalASSETSCurrent
      Assets
                            
                            $
                            28,516
                            
                            
                            $
                            130,524
                            
                            
                            $
                            159,040
                            
                            
                            $
                            (130,830
                            )
                            
                            $
                            28,210Property
      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
                            )
                            
                            
                            461,890Revenues
                            
                            
                            277,694
                            
                            
                            
                            -
                            
                            
                            
                            277,694
                            
                            
                            
                            -
                            
                            
                            
                            277,694Operating
      Expenses
                            
                            
                            281,641
                            
                            
                            
                            104
                            
                            
                            
                            281,745
                            
                            
                            
                            -
                            
                            
                            
                            281,745Operating
      loss
                            
                            
                            (3,947
                            )
                            
                            
                            (104
                            )
                            
                            
                            (4,051
                            )
                            
                            
                            -
                            
                            
                            
                            (4,051
                            )Investment
      in subsidiary
                            
                            
                            -
                            
                            
                            
                            40,389
                            
                            
                            
                            40,389
                            
                            
                            
                            (40,389
                            )
                            
                            
                            -Interest
      Expense and other
                            
                            
                            28,692
                            
                            
                            
                            3,889
                            
                            
                            
                            32,581
                            
                            
                            
                            -
                            
                            
                            
                            32,581Income
      tax expense
                            
                            
                            7,750
                            
                            
                            
                            7,875
                            
                            
                            
                            15,625
                            
                            
                            
                            -
                            
                            
                            
                            15,625Net
      Income (loss)
                            
                            
                            (40,389
                            )
                            
                            
                            (52,257
                            )
                            
                            
                            (92,646
                            )
                            
                            
                            40,389
                            
                            
                            
                            (52,257
                            )Cash
      flow provided by operations
                            
                            
                            8,374
                            
                            
                            
                            1
                            
                            
                            
                            8,375
                            
                            
                            
                            -
                            
                            
                            
                            8,375Cash
      flow used for investing activities
                            
                            
                            (8,951
                            )
                            
                            
                            -
                            
                            
                            
                            (8,951
                            )
                            
                            
                            -
                            
                            
                            
                            (8,951
                            )Cash
      flow provided by financing activities
                            
                            
                            10,777
                            
                            
                            
                            -
                            
                            
                            
                            10,777
                            
                            
                            
                            -
                            
                            
                            
                            10,777Net
      increase in cash
                            
                            
                            10,200
                            
                            
                            
                            1
                            
                            
                            
                            10,201
                            
                            
                            
                            -
                            
                            
                            
                            10,201Cash
      and equivalents at beginning of year
                            
                            
                            926
                            
                            
                            
                            150
                            
                            
                            
                            1,076
                            
                            
                            
                            -
                            
                            
                            
                            1,076Cash
      and equivalents at end of year
                            
                            
                            11,126
                            
                            
                            
                            151
                            
                            
                            
                            11,277
                            
                            
                            
                            -
                            
                            
                            
                            11,277


F-26





For
      the Year Ended December 31, 2008(in
      thousands)ConsolidatedEPL
                        
                        
                        Intermediate
                        
                        
                        Subtotal
                        
                        
                        Eliminations
                        
                        
                        TotalASSETSCurrent
      Assets
                        
                        $
                        13,572
                        
                        
                        $
                        171,225
                        
                        
                        $
                        184,797
                        
                        
                        $
                        (171,070
                        )
                        
                        $
                        13,727Property
      and Equipment
                        
                        
                        85,053
                        
                        
                        
                        -
                        
                        
                        
                        85,053
                        
                        
                        
                        -
                        
                        
                        
                        85,053Other
      Assets
                        
                        
                        368,165
                        
                        
                        
                        3,507
                        
                        
                        
                        371,672
                        
                        
                        
                        (3,181
                        )
                        
                        
                        368,491Total
      Assets
                        
                        
                        466,790
                        
                        
                        
                        174,732
                        
                        
                        
                        641,522
                        
                        
                        
                        (174,251
                        )
                        
                        
                        467,271LIABILITIES
      & EQUITYCurrent
      liabilities
                        
                        
                        42,757
                        
                        
                        
                        47
                        
                        
                        
                        42,804
                        
                        
                        
                        (3,181
                        )
                        
                        
                        39,623Non-current
      liabilities
                        
                        
                        252,963
                        
                        
                        
                        18,105
                        
                        
                        
                        271,068
                        
                        
                        
                        -
                        
                        
                        
                        271,068Equity
                        
                        
                        171,070
                        
                        
                        
                        156,580
                        
                        
                        
                        327,650
                        
                        
                        
                        (171,070
                        )
                        
                        
                        156,580Total
      Liabilities & Equity
                        
                        
                        466,790
                        
                        
                        
                        174,732
                        
                        
                        
                        641,522
                        
                        
                        
                        (174,251
                        )
                        
                        
                        467,271Revenues
                        
                        
                        298,930
                        
                        
                        
                        -
                        
                        
                        
                        298,930
                        
                        
                        
                        -
                        
                        
                        
                        298,930Operating
      Expenses
                        
                        
                        323,902
                        
                        
                        
                        83
                        
                        
                        
                        323,985
                        
                        
                        
                        -
                        
                        
                        
                        323,985Operating
      loss
                        
                        
                        (24,972
                        )
                        
                        
                        (83
                        )
                        
                        
                        (25,055
                        )
                        
                        
                        -
                        
                        
                        
                        (25,055
                        )Investment
      in subsidiary
                        
                        
                        -
                        
                        
                        
                        37,103
                        
                        
                        
                        37,103
                        
                        
                        
                        (37,103
                        )
                        
                        
                        -Interest
      Expense and other
                        
                        
                        22,716
                        
                        
                        
                        3,760
                        
                        
                        
                        26,476
                        
                        
                        
                        -
                        
                        
                        
                        26,476Income
      tax benefit
                        
                        
                        (10,584
                        )
                        
                        
                        (1,466
                        )
                        
                        
                        (12,050
                        )
                        
                        
                        -
                        
                        
                        
                        (12,050
                        )Net
      Income (loss)
                        
                        
                        (37,104
                        )
                        
                        
                        (39,480
                        )
                        
                        
                        (76,584
                        )
                        
                        
                        37,103
                        
                        
                        
                        (39,481
                        )Cash
      flow provided by operations
                        
                        
                        23,693
                        
                        
                        
                        17
                        
                        
                        
                        23,710
                        
                        
                        
                        -
                        
                        
                        
                        23,710Cash
      flow used for investing activities
                        
                        
                        (16,375
                        )
                        
                        
                        -
                        
                        
                        
                        (16,375
                        )
                        
                        
                        -
                        
                        
                        
                        (16,375
                        )Cash
      flow provided by (used in) financing activities
                        
                        
                        (10,225
                        )
                        
                        
                        125
                        
                        
                        
                        (10,100
                        )
                        
                        
                        -
                        
                        
                        
                        (10,100
                        )Net
      increase (decrease) in cash
                        
                        
                        (2,907
                        )
                        
                        
                        142
                        
                        
                        
                        (2,765
                        )
                        
                        
                        -
                        
                        
                        
                        (2,765
                        )Cash
      and equivalents at beginning of year
                        
                        
                        3,833
                        
                        
                        
                        8
                        
                        
                        
                        3,841
                        
                        
                        
                        -
                        
                        
                        
                        3,841Cash
      and equivalents at end of year
                        
                        
                        926
                        
                        
                        
                        150
                        
                        
                        
                        1,076
                        
                        
                        
                        -
                        
                        
                        
                        1,076


F-27





For the Year Ended December 26, 2007(in
      thousands)ConsolidatedEPL
                
                
                Intermediate
                
                
                Subtotal
                
                
                Eliminations
                
                
                TotalRevenues
                
                $
                279,025
                
                
                $
                -
                
                
                $
                279,025
                
                
                $
                -
                
                
                $
                279,025Operating
      Expenses
                
                
                250,678
                
                
                
                121
                
                
                
                250,799
                
                
                
                -
                
                
                
                250,799Operating
      Income (loss)
                
                
                28,347
                
                
                
                (121
                )
                
                
                28,226
                
                
                
                -
                
                
                
                28,226Investment
      in subsidiary
                
                
                -
                
                
                
                1,983
                
                
                
                1,983
                
                
                
                (1,983
                )
                
                
                -Interest
      Expense and other
                
                
                25,138
                
                
                
                4,029
                
                
                
                29,167
                
                
                
                -
                
                
                
                29,167Income
      tax expense (benefit)
                
                
                5,192
                
                
                
                (2,099
                )
                
                
                3,093
                
                
                
                -
                
                
                
                3,093Net
      Income (loss)
                
                
                (1,983
                )
                
                
                (4,034
                )
                
                
                (6,017
                )
                
                
                1,983
                
                
                
                (4,034
                )Cash
      flow provided by operations
                
                
                23,129
                
                
                
                -
                
                
                
                23,129
                
                
                
                -
                
                
                
                23,129Cash
      flow used for investing activities
                
                
                (21,070
                )
                
                
                -
                
                
                
                (21,070
                )
                
                
                -
                
                
                
                (21,070
                )Cash
      flow used in financing activities
                
                
                (1,173
                )
                
                
                -
                
                
                
                (1,173
                )
                
                
                -
                
                
                
                (1,173
                )Net
      increase in cash
                
                
                886
                
                
                
                -
                
                
                
                886
                
                
                
                -
                
                
                
                886Cash
      and equivalents at beginning of year
                
                
                2,947
                
                
                
                8
                
                
                
                2,955
                
                
                
                -
                
                
                
                2,955Cash
      and equivalents at end of year
                
                
                3,833
                
                
                
                8
                
                
                
                3,841
                
                
                
                -
                
                
                
                3,841





23.
RELATED PARTY TRANSACTIONS




On
November 18, 2005, CAC entered into a Monitoring and Management Services
Agreement with Trimaran Fund Management, L.L.C. (“Trimaran”), an affiliate of
the majority owner of CAC and of certain directors, which provides for annual
fees of $500,000 plus reasonable expenses. This Agreement was amended on
December 26, 2007 to add an affiliate of the FS Parties (see Note 2) as a party
to the Agreement. Such party shares in the fees payable under the Agreement.
During the years ended December 26, 2007, December 31, 2008 and December 30,
2009, $624,000, $525,000 and $588,000, respectively, was paid pursuant to this
Agreement. These amounts are included in other operating expenses in the
accompanying consolidated statements of operations.





In
connection with our appeal of certain trademark litigation, EPL posted an appeal
bond in the amount of $24,301,450. A portion of the appeal bond was
collateralized by a $17,900,000 letter of credit arranged by Trimaran Fund II,
LLC (“Trimaran Fund”). Trimaran Fund is a 20.6% member of the LLC and an
affiliate of certain directors.  To compensate Trimaran Fund for this
accommodation, on December 19, 2007, EPL and CAC entered into two agreements
pursuant to which, among other things, EPL paid Trimaran Fund an up-front fee of
$536,000, representing 3% of the amount of the letter of credit, and EPL agreed
to reimburse Trimaran Fund for any amounts it paid in connection with the letter
of credit.   These agreements were terminated following the
settlement of this litigation and Trimaran Fund reimbursed EPL $277,000 of the
$536,000 up front fee.





On
September 24, 2009, EPL purchased four El Pollo Loco restaurants located in the
Atlanta, Georgia area previously owned and operated by an EPL franchisee, Fiesta
Brands, Inc., and related assets, and assumed various operating contracts,
including the leases, relating to the four purchased restaurants.  EPL will
continue to operate the four purchased restaurants. EPL also purchased
furniture, fixtures and equipment of five other El Pollo Loco restaurants
previously operated by Fiesta Brands, Inc. which have been closed. The purchase
price of $1.7 million consisted of cash and was accounted for using the purchase
method of accounting in accordance with Accounting Standards Codification
(“ASC”) 805-10, Business Combinations. The Company’s allocation of the purchase
price to the fair value of the acquired assets was as follows: equipment, $0.4
million and building and leasehold improvements, $1.3 million. Results of
operations of the Atlanta restaurants are included in the Company’s financial
statements beginning as of the acquisition date.  Fiesta Brands, Inc. is an
affiliate of the Company’s principal stockholders and certain Company
directors.


F-28





The
Company had receivables from affiliated entities of $221,000 and $308,000 as of
December 31, 2008 and December 30, 2009, respectively.


F-29


Report
of Independent Registered Public Accounting Firm




To the
Board of Directors and Stockholders of El Pollo Loco, Inc.





Costa
Mesa, California




We have
audited the accompanying balance sheets of El Pollo Loco, Inc. (the “Company”),
a wholly owned subsidiary of EPL Intermediate, Inc., as of December 30, 2009,
and December 31, 2008, and the related statements of operations, stockholder’s
equity, and cash flows for each of the years ended December 30, 2009, December
31, 2008 and December 26, 2007. These financial statements are the
responsibility of the Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.




In our
opinion, such financial statements present fairly, in all material respects, the
financial position of the Company as of December 30, 2009 and December 31, 2008,
and the results of its operations and its cash flows for each of the years ended
December 30, 2009, December 31, 2008 and December 26, 2007, in conformity with
accounting principles generally accepted in the United States of
America.




/s/
DELOITTE & TOUCHE LLP




Costa
Mesa, California




March 30,
2010


F-30








El Pollo Loco,
Inc.


Balance Sheets


(Amounts
in thousands)




December 31, 2008
                        
                        
                        December 30, 2009AssetsCurrent
      Assets:Cash
      and cash equivalents
                        
                        $
                        926
                        
                        
                        $
                        11,126Restricted
      cash
                        
                        
                        -
                        
                        
                        
                        131Not  Accounts
      and other receivables-net
                        
                        
                        4,472
                        
                        
                        
                        9,607Inventories
                        
                        
                        1,756
                        
                        
                        
                        1,606Prepaid
      expenses and other current assets
                        
                        
                        4,635
                        
                        
                        
                        5,258Inco
      Income taxes receivable
                        
                        
                        43
                        
                        
                        
                        -Def  Deferred
      income taxes
                        
                        
                        1,740
                        
                        
                        
                        788Total
      Current assets
                        
                        $
                        13,572
                        
                        
                        $
                        28,516Property
      Owned –Net
                        
                        $
                        84,321
                        
                        
                        $
                        77,344Property
      Held Under Capital Leases—Net
                        
                        
                        732
                        
                        
                        
                        524Goodwill—Net
                        
                        
                        249,924
                        
                        
                        
                        249,924Domestic
      Trademarks—Net
                        
                        
                        103,100
                        
                        
                        
                        91,788Other
      Intangible Assets—Net
                        
                        
                        9,157
                        
                        
                        
                        1,900Other
      Assets
                        
                        
                        5,984
                        
                        
                        
                        11,929Total
      Assets
                        
                        $
                        466,790
                        
                        
                        $
                        461,925Liabilities
      and Stockholder’s EquityCurrent
      Liabilities:Revolving
      credit facility
                        
                        $
                        5,000
                        
                        
                        $
                        -Current
      portion of note payable
                        
                        
                        5,889
                        
                        
                        
                        -Current
      portion of senior secured notes
                        
                        
                        250
                        
                        
                        
                        -Current
      portion of obligations under capital leases
                        
                        
                        601
                        
                        
                        
                        341Accounts
      payable
                        
                        
                        12,438
                        
                        
                        
                        20,607Accrued
      salaries
                        
                        
                        3,410
                        
                        
                        
                        4,289Accrued
      vacation
                        
                        
                        2,075
                        
                        
                        
                        2,010Accrued
      insurance
                        
                        
                        1,723
                        
                        
                        
                        1,545Accrued
      income taxes payable
                        
                        
                        -
                        
                        
                        
                        15Accrued
      interest
                        
                        
                        1,641
                        
                        
                        
                        2,942Accrued
      advertising
                        
                        
                        380
                        
                        
                        
                        96Other
      accrued expenses and current liabilities
                        
                        
                        9,350
                        
                        
                        
                        8,287Total
      current liabilities
                        
                        $
                        42,757
                        
                        
                        $
                        40,132Noncurrent
      Liabilities:Senior
      secured notes (2012 Notes)
                        
                        $
                        -
                        
                        
                        $
                        130,407Senior
      unsecured notes payable (2013 Notes)
                        
                        
                        108,163
                        
                        
                        
                        106,347Note
      payable—less current portion
                        
                        
                        93,464
                        
                        
                        
                        -Obligations
      under capital leases—less current portion
                        
                        
                        2,104
                        
                        
                        
                        1,763Deferred
      income taxes
                        
                        
                        31,517
                        
                        
                        
                        38,237Other
      intangible liabilities
                        
                        
                        4,883
                        
                        
                        
                        3,998Other
      noncurrent liabilities
                        
                        
                        12,832
                        
                        
                        
                        10,673Total
      noncurrent liabilities
                        
                        $
                        252,963
                        
                        
                        $
                        291,425Commitments
      and contingencies:Stockholder’s
      equity:Common
      stock, $.01 par value—20,000 shares authorized; 100 shares issued and
      outstanding
                        
                        
                        –
                        
                        
                        
                        –Additional
      paid-in-capital
                        
                        
                        207,052
                        
                        
                        
                        206,739Accumulated
      deficit
                        
                        
                        (35,982
                        )
                        
                        
                        (76,371
                        )Total
      stockholder’s equity
                        
                        
                        171,070
                        
                        
                        
                        130,368Total
                        
                        $
                        466,790
                        
                        
                        $
                        461,925




See notes
to financial statements.


F-31


El Pollo Loco,
Inc.


Statements of
Operations


(Amounts
in thousands)





Year EndedDecember 26,
                    2007
                  
                  
                  December 31,
                    2008
                  
                  
                  December 30,
                    2009Operating
      revenue:Restaurant
      revenue
                  
                  $
                  259,987
                  
                  
                  $
                  278,343
                  
                  
                  $
                  258,904Franchise
      and licensing revenue
                  
                  
                  19,038
                  
                  
                  
                  20,587
                  
                  
                  
                  18,790Total
      operating revenue
                  
                  $
                  279,025
                  
                  
                  $
                  298,930
                  
                  
                  $
                  277,694Operating
      Expenses:Product
      cost
                  
                  $
                  81,233
                  
                  
                  $
                  89,442
                  
                  
                  $
                  83,391Payroll
      and benefits
                  
                  
                  67,545
                  
                  
                  
                  73,139
                  
                  
                  
                  68,806Depreciation
      and amortization
                  
                  
                  11,947
                  
                  
                  
                  13,007
                  
                  
                  
                  11,359Other
      operating expenses
                  
                  
                  89,953
                  
                  
                  
                  106,221
                  
                  
                  
                  100,655Impairment
      of intangible assets
                  
                  
                  –
                  
                  
                  
                  42,093
                  
                  
                  
                  17,430Total  operating
      expenses
                  
                  $
                  250,678
                  
                  
                  $
                  323,902
                  
                  
                  $
                  281,641Operating
      income (loss)
                  
                  $
                  28,347
                  
                  
                  $
                  (24,972
                  )
                  
                  $
                  (3,947
                  )Interest
      expense, net
                  
                  
                  25,138
                  
                  
                  
                  22,430
                  
                  
                  
                  28,701Other
      expense
                  
                  
                  –
                  
                  
                  
                  2,043
                  
                  
                  
                  443Other
      income
                  
                  
                  –
                  
                  
                  
                  (1,757
                  )
                  
                  
                  (452
                  )Income
      (loss) before provision for income taxes
                  
                  
                  3,209
                  
                  
                  
                  (47,688
                  )
                  
                  
                  (32,639
                  )Provision
      (benefit) for income taxes
                  
                  
                  5,192
                  
                  
                  
                  (10,584
                  )
                  
                  
                  7,750Net
      loss
                  
                  $
                  (1,983
                  )
                  
                  $
                  (37,104
                  )
                  
                  $
                  (40,389
                  )




See notes
to financial statements.


F-32


El Pollo Loco,
Inc.


Statement of Stockholder's
Equity


(Amounts
in thousands, except per share data)




Common
                          Shares
                        
                        
                        Amount
                        
                        
                        Additional
                          Paid-in
                          Capital
                        
                        
                        Retained
                          Earnings
                          (Accumulated
                          Deficit)
                        
                        
                        TotalBalance,
      December 27, 2006
                        
                        
                        100
                        
                        
                        
                        –
                        
                        
                        $
                        187,671
                        
                        
                        $
                        3,105
                        
                        
                        $
                        190,776Stock-based
      compensation
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        754
                        
                        
                        
                        
                        
                        
                        
                        754Tax
      benefit from exercise / cancellation of stock options
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        (69
                        )
                        
                        
                        
                        
                        
                        
                        (69
                        )Repurchase
      of common stock
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        (54
                        )
                        
                        
                        
                        
                        
                        
                        (54
                        )Capital
      contribution
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        3,000
                        
                        
                        
                        
                        
                        
                        
                        3,000Net
      loss
                        
                        
                        
                        
                        
                        
                        –
                        
                        
                        
                        –
                        
                        
                        
                        (1,983
                        )
                        
                        
                        (1,983
                        )Balance,
      December 26, 2007
                        
                        
                        100
                        
                        
                        
                        –
                        
                        
                        $
                        191,302
                        
                        
                        $
                        1,122
                        
                        
                        $
                        192,424Stock-based
      compensation
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        768
                        
                        
                        
                        
                        
                        
                        
                        768Tax
      benefit from exercise / cancellation of stock options
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        68
                        
                        
                        
                        
                        
                        
                        
                        68Repurchase
      of common stock
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        (78
                        )
                        
                        
                        
                        
                        
                        
                        (78
                        )Proceeds
      from issuance of common stock
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        50
                        
                        
                        
                        
                        
                        
                        
                        50Capital
      contribution
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        14,942
                        
                        
                        
                        
                        
                        
                        
                        14,942Net
      loss
                        
                        
                        
                        
                        
                        
                        –
                        
                        
                        
                        –
                        
                        
                        
                        (37,104
                        )
                        
                        
                        (37,104
                        )Balance,
      December 31, 2008
                        
                        
                        100
                        
                        
                        
                        –
                        
                        
                        $
                        207,052
                        
                        
                        $
                        (35,982
                        )
                        
                        $
                        171,070Stock-based
      compensation
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        568
                        
                        
                        
                        
                        
                        
                        
                        568Repurchase
      of common stock
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        (881
                        )
                        
                        
                        
                        
                        
                        
                        (881
                        )Net
      loss
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        –
                        
                        
                        
                        (40,389
                        )
                        
                        
                        (40,389
                        )Balance,
      December 30, 2009
                        
                        
                        100
                        
                        
                        
                        –
                        
                        
                        $
                        206,739
                        
                        
                        $
                        (76,371
                        )
                        
                        $
                        130,368




See notes
to financial statements.


F-33





El Pollo Loco,
Inc.


Statements of Cash
Flows


(Amounts
in thousands)





Year EndedDecember 26,
                      2007
                    
                    
                    December 31,
                      2008
                    
                    
                    December 30,
                      2009Cash
      Flows From Operating Activities:Net
      loss
                    
                    $
                    (1,983)
                    
                    
                    $
                    (37,104
                    )
                    
                    $
                    (40,389
                    )Adjustments
      to reconcile net loss to net cash provided by operating
      activities:Depreciation
      and amortization
                    
                    
                    11,947
                    
                    
                    
                    13,007
                    
                    
                    
                    11,359Stock-based
      compensation expense
                    
                    
                    754
                    
                    
                    
                    768
                    
                    
                    
                    568Interest
      accretion
                    
                    
                    197
                    
                    
                    
                    250
                    
                    
                    
                    726(Gain)
      loss on disposal of assets
                    
                    
                    2,558
                    
                    
                    
                    (538
                    )
                    
                    
                    174Gain
      on repurchase of bonds
                    
                    
                    –
                    
                    
                    
                    (1,755
                    )
                    
                    
                    (452
                    )Asset
      impairment
                    
                    
                    –
                    
                    
                    
                    1,919
                    
                    
                    
                    4,156Impairment
      of intangible assets
                    
                    
                    –
                    
                    
                    
                    42,093
                    
                    
                    
                    17,430Amortization
      of deferred financing costs
                    
                    
                    1,317
                    
                    
                    
                    1,298
                    
                    
                    
                    3,424Amortization
      of favorable / unfavorable leases
                    
                    
                    (469
                    )
                    
                    
                    (172
                    )
                    
                    
                    (203
                    )Deferred
      income taxes
                    
                    
                    2,539
                    
                    
                    
                    (10,645
                    )
                    
                    
                    7,672E
      Excess tax benefits related to exercise / cancellation of stock
      options
                    
                    
                    (69
                    )
                    
                    
                    (68
                    )
                    
                    
                    –Litigation
      settlements-net
                    
                    
                    –
                    
                    
                    
                    10,942
                    
                    
                    
                    6,220Change
      in fair value of interest rate swap
                    
                    
                    –
                    
                    
                    
                    2,049
                    
                    
                    
                    443Changes
      in operating assets and liabilities:Accounts
      and other receivables—net
                    
                    
                    (67
                    )
                    
                    
                    (841
                    )
                    
                    
                    (635
                    )Inventories
                    
                    
                    (218
                    )
                    
                    
                    22
                    
                    
                    
                    150Prepaid
      expenses and other current assets
                    
                    
                    149
                    
                    
                    
                    (960
                    )
                    
                    
                    (623
                    )Income
      taxes receivable / payable
                    
                    
                    170
                    
                    
                    
                    (145
                    )
                    
                    
                    59Other
      assets
                    
                    
                    (230
                    )
                    
                    
                    1,240
                    
                    
                    
                    (214
                    )Accounts
      payable
                    
                    
                    3,026
                    
                    
                    
                    (173
                    )
                    
                    
                    (1,757
                    )Accrued
      salaries and vacation
                    
                    
                    162
                    
                    
                    
                    (176
                    )
                    
                    
                    814Accrued
      insurance
                    
                    
                    (2,457
                    )
                    
                    
                    311
                    
                    
                    
                    (178
                    )O
      Other accrued expenses and current and noncurrent
    liabilities
                    
                    
                    5,803
                    
                    
                    
                    2,371
                    
                    
                    
                    (370
                    )Net
      cash provided by operating activities
                    
                    $
                    23,129
                    
                    
                    $
                    23,693
                    
                    
                    $
                    8,374Cash
      Flow From Investing Activities:Proceeds
      from asset disposition
                    
                    $
                    8,035
                    
                    
                    $
                    1,080
                    
                    
                    $
                    –Purchase
      of franchise restaurants
                    
                    
                    (8,358
                    )
                    
                    
                    -
                    
                    
                    
                    (1,720
                    )Purchase
      of property
                    
                    
                    (20,747
                    )
                    
                    
                    (17,455
                    )
                    
                    
                    (7,100
                    )Restricted
      cash
                    
                    
                    -
                    
                    
                    
                    –
                    
                    
                    
                    (131
                    )Net
      cash used in investing activities
                    
                    $
                    (21,070
                    )
                    
                    $
                    (16,375
                    )
                    
                    $
                    (8,951
                    )Cash
      Flows from Financing Activities:Proceeds
      from issuance of common stock
                    
                    $
                    -
                    
                    
                    $
                    50
                    
                    
                    $
                    –Repurchase
      of common stock
                    
                    
                    (54
                    )
                    
                    
                    (78
                    )
                    
                    
                    (881
                    )Excess
      tax benefits related to exercise / cancellation of stock
      options
                    
                    
                    69
                    
                    
                    
                    68
                    
                    
                    
                    –Capital
      contribution
                    
                    
                    3,000
                    
                    
                    
                    4,000
                    
                    
                    
                    –Proceeds
      from borrowings
                    
                    
                    17,000
                    
                    
                    
                    9,000
                    
                    
                    
                    133,850Payment
      of obligations under capital leases
                    
                    
                    (1,252
                    )
                    
                    
                    (1,044
                    )
                    
                    
                    (601
                    )Payments
      on  debt
                    
                    
                    (19,763
                    )
                    
                    
                    (8,600
                    )
                    
                    
                    (4,934
                    )Payment
      related to termination of interest rate swap agreement
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (2,280
                    )Repurchase
      of notes
                    
                    
                    –
                    
                    
                    
                    (13,621
                    )
                    
                    
                    (105,139
                    )Deferred
      financing costs
                    
                    
                    (173
                    )
                    
                    
                    -
                    
                    
                    
                    (9,238
                    )Net
      cash (used in) provided by financing activities
                    
                    $
                    (1,173
                    )
                    
                    $
                    (10,225
                    )
                    
                    $
                    10,777Increase
      (Decrease) in Cash and Cash Equivalents
                    
                    $
                    886
                    
                    
                    $
                    (2,907
                    )
                    
                    $
                    10,200Cash
      and Cash EquivalentsBeginning
      of year
                    
                    
                    2,947
                    
                    
                    
                    3,833
                    
                    
                    
                    926Cash
      and Cash EquivalentsEnd
      of year
                    
                    $
                    3,833
                    
                    
                    $
                    926
                    
                    
                    $
                    11,126Supplemental
      Disclosure of Cash Flow InformationCash
      paid during the year for:Interest
      (net of amounts capitalized)
                    
                    $
                    25,025
                    
                    
                    $
                    21,624
                    
                    
                    $
                    23,552Income
      taxes
                    
                    $
                    38
                    
                    
                    $
                    165
                    
                    
                    $
                    19Supplemental
      Schedule of Non-Cash Activities:Litigation
      settlement paid by Chicken Acquisition Corp. on behalf of the Company,
      treated as a capital contribution
                    
                    $
                    –
                    
                    
                    $
                    10,942
                    
                    
                    $
                    –Unpaid
      purchases of property and equipment
                    
                    $
                    1,358
                    
                    
                    $
                    822
                    
                    
                    $
                    29




See notes
to financial statements.


F-34


EL
POLLO LOCO, INC.




(A
Wholly Owned Subsidiary of EPL Intermediate, Inc.)




NOTES
TO FINANCIAL STATEMENTS




1.
DESCRIPTION OF BUSINESS




El Pollo
Loco, Inc. (“EPL” or the "Company") is a Delaware corporation headquartered in
Costa Mesa, California. The Company’s activities are primarily developing,
franchising, licensing and operating quick-service restaurants under the name El
Pollo Loco®. The restaurants, which are located principally in California but
also in Arizona, Colorado, Connecticut, Georgia, Illinois, Missouri, Nevada, New
Jersey, Oregon, Texas, Utah and Virginia, specialize in flame-grilled chicken in
a wide variety of contemporary Mexican-influenced entrees, including specialty
chicken burritos, chicken quesadillas, chicken tortilla soup, Pollo Bowls and
Pollo Salads. At December 30, 2009, the Company operated 172 (130 in the
greater Los Angeles area) and franchised 243 (138 in the greater Los Angeles
area) El Pollo Loco restaurants. The Company is a wholly owned subsidiary of EPL
Intermediate, Inc. (“Intermediate”), which is a wholly owned subsidiary of El
Pollo Loco Holdings, Inc. (“Holdings”). Holdings is an indirect wholly owned
subsidiary of Chicken Acquisition Corp. ("CAC"). EPL Intermediate, Inc. was
acquired by CAC on November 17, 2005 (the “Acquisition”).




Intermediate
has no material assets or operations.  Intermediate’s guarantee of EPL’s
revolving credit facility, and EPL’s 113⁄4% Senior Notes due in 2012 and 2013 is
full and unconditional and Intermediate has no subsidiaries other than
EPL.  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.


F-35


2.
EQUITY INVESTMENT IN CHICKEN ACQUISITION CORPORATION




The
Company is a wholly owned subsidiary of Intermediate, which is a wholly owned
indirect subsidiary of CAC, which is 99.6% owned by Trimaran Pollo Partners, LLC
(the “LLC”) (which is controlled by affiliates of Trimaran Capital, LLC). The
LLC’s only material asset is its investment in CAC. CAC’s only material asset,
other than cash, is its investment in Intermediate.




On
December 26, 2007, Intermediate entered into a Unit Purchase Agreement with the
LLC, CAC, EPL, FS Equity Partners V, L.P. (“FSEP V”), FS Affiliates V, L.P.
(“FSA V”), Peter Starrett (“Starrett” and collectively with FSEP V and FSA V,
the “Purchasers”), and certain members of the LLC (the “Unit Purchase
Agreement”). Pursuant to the Unit Purchase Agreement, the Purchasers acquired
409,091 membership units from the LLC, for an aggregate purchase price of $45
million. The LLC contributed the proceeds of this sale to CAC in consideration
for 409,091 newly issued CAC shares. The LLC owned 1,910,753 CAC shares prior to
the transaction and 2,319,844 CAC shares after the transaction, representing
99.6% of CAC’s outstanding shares. CAC paid various fees and
expenses related to this transaction of approximately $1.8 million. FSEP V
and FSA V (the “FS Parties”) are affiliates of one of our
directors.





On
December 26, 2007, CAC made a $3 million capital contribution to EPL through
intermediary subsidiaries. On January 25, 2008, CAC made an $8 million capital
contribution to Intermediate. Intermediate used $7.8 million of these proceeds
to repurchase outstanding 14.5% PIK senior discount notes on Intermediate’s
books at a price that approximated their accreted net book value. In May of
2008, CAC made a $4.0 million capital contribution to EPL that was used for
normal operating purposes.  On June 18, 2008, we settled the Mexico
Litigation as described in Note 20.  The settlement payment of $10.7
million was paid by CAC on behalf of EPL.  This payment is accounted
for as a capital contribution by CAC to EPL.  CAC may make future
capital contributions to the Company but it is not legally obligated to do
so.





3.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES




Basis of
Presentation —
The Company uses a 52- or 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. Approximately every six or seven years a 53-week fiscal year occurs.
Fiscal 2007 and 2009, which were 52-week years, ended December 26, 2007 and
December 30, 2009, respectively. Fiscal year 2008, which ended December 31,
2008, was a 53-week fiscal year.  The accompanying consolidated
balance sheets present the Company’s financial position as of December 31,
2008 and December 30, 2009. The accompanying consolidated statements of
operations, stockholder’s equity and cash flows present the years ended December
26, 2007, December 31, 2008 and December 30, 2009.





Correction— Subsequent to the
issuance of its December 31, 2008 consolidated financial statements, the Company
corrected the purchase price allocation related to the acquisition of the
outstanding common stock of the Company on November 17, 2005 to properly record
related deferred tax liabilities.  This correction resulted in a reduction
of goodwill and deferred tax liabilities in the amount of $2,494,000 as of
December 31, 2008 from amounts previously presented.




Cash and Cash
Equivalents — The
Company considers all highly liquid instruments with a maturity of three months
or less at the date of purchase to be cash equivalents.





Restricted cash—The Company’s
restricted cash represents cash collateral to one commercial bank for company
credit cards.





Concentration of
risk—The Company
maintains all 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.




Accounts and
Other Receivables - Net —  Accounts and
other receivables consist primarily of royalties, advertising and sublease rent
and related amounts receivable from franchisees which are due on a monthly basis
that may differ from the Company’s month-end dates as well as credit card
receivables and a litigated insurance claim of $4.5 million that was collected
on February 2, 2010.




Inventories
— Inventories consist
principally of food, beverages and paper supplies and are valued at the lower of
average cost or market.


F-36





Property
Owned - Net — Property is stated at cost
and is depreciated using the straight-line method over the estimated useful
lives of the assets. Leasehold improvements and property held under capital
leases are amortized over the shorter of their estimated useful lives or the
remaining lease terms. For leases with renewal periods at the Company’s option,
the Company generally uses the original lease term, excluding the option
periods, to determine estimated useful lives; if failure to exercise a renewal
option imposes an economic penalty on the Company, such that management
determines at the inception of the lease that renewal is reasonably assured, the
Company includes the renewal option period in the determination of appropriate
estimated useful lives.




The
estimated useful service lives are as follows:




Buildings
            
            20
      yearsLand improvements
            
            3-30 yearsBuilding improvements
            
            3-10
      yearsRestaurant equipment
            
            3-10
      yearsOther
      equipment
            
            2-10
      yearsLeasehold improvements
            
            Estimated useful life limited by the lease term




The
Company capitalizes certain costs in conjunction with site selection that relate
to specific sites for planned future restaurants. The Company also capitalizes
certain costs, including interest, in conjunction with constructing new
restaurants. These costs are included in property and amortized over the shorter
of the life of the related buildings and leasehold improvements or the lease
term. Costs related to abandoned sites and other site selection costs that
cannot be identified with specific restaurants are charged to operations. The
Company capitalized $4,000, $0 and $0 of internal costs related to site
selection and construction activities during the years ended December 26, 2007,
December 31, 2008 and December 30, 2009, respectively. The Company also
capitalized $252,000, $205,000 and $35,000, of interest expense during the years
ended December 26, 2007, December 31, 2008 and December 30, 2009,
respectively.




Goodwill and
Other Intangible Assets - Net — Intangible assets consist
primarily of goodwill and the value allocated to the Company’s trademarks,
franchise network and favorable and unfavorable leasehold interests. Goodwill
represents the excess of cost over fair value of net identified assets acquired
in business combinations accounted for under the purchase method. Goodwill
resulted from the Acquisition by CAC and from the acquisition of certain
franchise locations.




In
accordance with ASC 350 “Intangibles—Goodwill and Other”, previously SFAS 142,
Goodwill and Other Intangible
Assets (,”FAS 142”), we do not amortize goodwill and certain intangible
assets with an indefinite life, including domestic trademarks. Goodwill is
subject to periodic evaluation for impairment when circumstances warrant, or at
least once per year. Our impairment evaluation for goodwill is conducted
annually coinciding with our fiscal year end.  If the estimated fair
value is less than the carrying amount of the other intangible assets with
indefinite lives, then an impairment charge is recorded to reduce the asset to
its estimated fair value. Based on the Company’s analysis described below, in
fiscal 2009, we recorded a non-cash full impairment of $6.1 million for our
franchise network and recorded a non-cash impairment of domestic trademarks of
$11.3 million.   In fiscal 2008, we recorded a non-cash
impairment of goodwill of $24.5 million and recorded a non-cash impairment of
domestic trademarks of $17.6 million. No impairment was recorded in
2007.





Intangible
assets and liabilities with a definite life are amortized using the
straight-line method over their estimated useful lives as follows:





Franchise
      network
            
            17.5 yearsFavorable
      leasehold interests
            
            1 to 18 years (remaining lease term)Unfavorable
      leasehold interests
            
            1 to 20 years (remaining lease term)





Deferred
Financing Costs — Deferred
financing costs are recorded at cost and amortized using the effective interest
method over the terms of the related notes. Deferred financing costs are
included in other assets and the related amortization is reflected as a
component of interest expense in the accompanying consolidated financial
statements.


F-37


Impairment of
Long-Lived Assets—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 a non-cash impairment charge of approximately $4.2 million for the year
ended December 30, 2009 for five under-performing company-operated
restaurants that will continue to be operated.    The
Company recorded a non-cash impairment charge of approximately $1.9 million for
the year ended December 31, 2008 for three under-performing
company-operated restaurants that will continue to be operated. These amounts
are included in other operating expenses on our consolidated statement of
operations. No impairment charges were recorded in 2007.




Insurance
Reserves — The
Company is responsible for workers’ compensation and health insurance claims up
to a specified aggregate stop loss amount. The Company maintains a reserve for
estimated claims, both reported and incurred but not reported, based on
historical claims experience and other assumptions.  These amounts are
included in payroll and benefits and other operating expenses on our
consolidated statement of operations.




Restaurant and
Franchise Revenue — Revenues from the operation
of Company-operated restaurants are recognized as products are delivered to
customers. Franchise revenue consists of franchise royalties, initial franchise
fees, license fees due from franchisees, IT support services and rental income
for leases and subleases to franchisees. Franchise royalties are based upon a
percentage of net sales of the franchisee and are recorded as income as such
sales are reported by the franchisees. Initial franchise and license fees are
recognized when all material obligations have been performed and conditions have
been satisfied, typically when operations have commenced. Initial franchise fees
recognized during the years ended December 26, 2007, December 31, 2008 and
December 30, 2009, totaled $1,049,000, $1,184,000 and $663,000, respectively.
Sales tax collected from our customers is recorded on a net basis.




Advertising
Costs —
Production costs for radio and television commercials are initially capitalized
and then fully expensed when the commercials are first aired. Advertising
expense, which is a component of other operating expenses, was $10,361,000,
$11,204,000 and $10,463,000 for the years ended December 26, 2007, December 31,
2008 and December 31, 2009, respectively, and is net of $13,605,000, $15,169,000
and $14,136,000, respectively, funded by the franchisees’ advertising
fees.




Franchisees
pay a monthly fee to the Company that ranges from 4% to 5% of their restaurants’
net sales as reimbursement for advertising, public relations and promotional
services the Company provides. Fees received in advance of provided services are
included in other accrued expenses and current liabilities and were $380,000 and
$96,000 at December 31, 2008 and December 30, 2009, respectively. Pursuant
to the Company’s Franchise Disclosure Document, our company-operated restaurants
contribute to the advertising fund on the same basis as franchised
restaurants.  At December 30, 2009, the Company was obligated to
spend an additional $64,000 in future periods to comply with this
requirement.




Preopening
Costs —
Preopening costs incurred in connection with the opening of new restaurants are
expensed as incurred. These amounts are included in other operating expenses on
our consolidated statement of operations.




Franchise Area
Development Fees — The Company receives area
development fees from franchisees when they execute multi-unit area development
agreements. The Company does not recognize revenue from the agreements until the
related restaurants open or in certain circumstances, the fees are applied to
satisfy other obligations of the franchisee. Unrecognized area development fees
totaled $1,355,000 and $990,000 at December 31, 2008 and December 30,
2009, respectively, and are included in other accrued expenses and current
liabilities and other noncurrent liabilities in the accompanying consolidated
balance sheets.





Operating
Leases — Rent
expense for the Company’s operating leases, which generally have escalating
rentals over the term of the lease, is recorded on a straight-line basis over
the lease term, as defined in ASC 840, “Leases”, as amended. The lease term
begins when the Company has the right to control the use of the leased property,
which is typically before rent payments are due under the terms of the
lease.  Rent expense is included in other operating expenses on our
consolidated statement of operations. The difference between rent expense and
rent paid is recorded as deferred rent, which is included in other noncurrent
liabilities in the accompanying consolidated balance sheets, and is amortized
over the term of the lease.




Income
Taxes — Deferred
income taxes are provided for temporary differences between the bases of assets
and liabilities for financial statement purposes and income tax purposes.
Deferred income taxes are based on enacted income tax rates in effect when the
temporary differences are expected to reverse. A valuation allowance is provided
when it is more likely than not that some portion or all of the deferred income
tax asset will not be realized.





Comprehensive
Loss—For the
years ended December 30, 2009, December 31, 2008 and December 26, 2007,
there was no difference between the Company’s net loss and comprehensive
loss.





Use of
Estimates — The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and revenue and expenses during the period reported.
Actual results could materially differ from those estimates.


F-38




Financial
Instruments — The
recorded values of accounts receivable, accounts payable and certain accrued
expenses approximate fair values based on their short-term nature. The recorded
values of notes payable approximate fair value, as interest approximates market
rates. The recorded value of other notes payable and senior secured notes
payable approximates fair value, based on borrowing rates currently available to
the Company for loans with similar terms and remaining maturities.




Accounting for
Stock Based Compensation — The Company adopted the
provisions of ASC 718 “Compensation-Stock Compensation”; previously Financial
Accounting Standards Board (“FASB”) Statement No. 123(R), Share-Based Payment on
December 29, 2005, which requires companies to expense the estimated fair
value of employee stock options and similar awards based on the grant-date fair
value of the award. The Company adopted ASC 718  using a prospective
application, which only applies to new awards and any awards that are modified
or cancelled subsequent to the date of adoption of ASC 718.




Segment
Reporting — The
Company develops, franchises and operates quick-service restaurants under the
name El Pollo Loco, which provide similar products to similar customers. The
restaurants possess similar economic characteristics resulting in similar
long-term expected financial performance characteristics. Operating segments are
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance. Based on its
methods of internal reporting and management structure, management determined
that the Company operates in a single reporting segment.





Recent Accounting
Changes — FASB Accounting Standards Codification


(Accounting
Standards Update (“ASU”) 2009-01)





In
June 2009, the “FASB” approved the FASB Accounting Standards Codification
as the single source of authoritative nongovernmental generally accepted
accounting principles (“GAAP”). All existing accounting standard documents, such
as FASB, American Institute of Certified Public Accountants, Emerging Issues
Task Force and other related literature, excluding guidance from the Securities
and Exchange Commission (“SEC”), have been superseded by the Codification. All
other non-grandfathered, non-SEC accounting literature not included in the
Codification has become nonauthoritative. The Codification did not change GAAP,
but instead introduced a new structure that combines all authoritative standards
into a comprehensive, topically organized online database. The Codification is
effective for interim or annual periods ending after September 15, 2009,
and impacts the Company’s financial statements as all future references to
authoritative accounting literature will be referenced in accordance with the
Codification. There have been no changes to the content of the Company’s
financial statements or disclosures as a result of implementing the Codification
during the year ended December 30, 2009.





As a
result of the Company’s implementation of the Codification during the year ended
December 30, 2009, previous references to new accounting standards and
literature are no longer applicable. In the current year financial statements,
the Company will provide reference to both new and old guidance to assist in
understanding the impacts of recently adopted accounting literature,
particularly for guidance adopted since the beginning of the current fiscal year
but prior to the Codification.





The
following are recent accounting standards adopted or issued that could have an
impact on our Company:





Consolidation
of Variable Interest Entities – Amended


(Included
in Accounting Standards Codification (“ASC”) 810 “Consolidation”; previously
SFAS No. 167 “Amendments to FASB Interpretation No. 46(R)”)





In June
2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation
No. 46(R),” (“SFAS No. 167”) which amends the consolidation guidance that
applies to variable interest entities under FIN 46(R). SFAS No. 167 changes
how a company determines when an entity that is insufficiently capitalized or is
not controlled through voting (or similar rights) should be consolidated. This
statement is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2009. We are currently
evaluating the impact, if any, the adoption of ASC 810 “Consolidation” may have
on our consolidated financial position or results of operations.





In
October 2009, the FASB issued ASU No. 2009-13, which amends the guidance in ASC
605. ASU 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 surrounding multiple-deliverable
arrangements. ASU 2009-13 will be effective for revenue arrangements entered
into for fiscal years beginning on or after June 15, 2010. We are currently
evaluating the impact, if any, the adoption of ASU 2009-13 may have on our
consolidated financial position or results of operations.


F-39





In
January 2010, the FASB issued ASU 2010-06, which amends ASC 820 to add new
requirements for disclosures about transfers into and out of Levels 1 and 2 and
separate disclosures about purchases, sales, issuances, and settlements relating
to Level 3 measurements. The ASU also clarifies existing fair value disclosures
about the level of disaggregation and about inputs and valuation techniques used
to measure fair value. The ASU is effective for the first reporting period
(including interim periods) beginning after December 15, 2009, except for the
requirement to provide the Level 3 activity of purchases, sales, issuances, and
settlements on a gross basis, which will be effective for fiscal years beginning
after December 15, 2010, and for interim periods within those fiscal years. We
are currently evaluating the impact, if any, the adoption of ASU 2010-06 may
have on our consolidated financial position or results of
operations.





4.
SALE AND ACQUISITIONS OF RESTAURANTS




On June
29, 2007, the Company acquired the assets of three previously franchised
restaurants (“Las Vegas restaurants”). The purchase price of $8.4 million
consisted of cash and was accounted for using the purchase method of accounting
in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 141,
Business Combinations.
The Company’s allocation of the purchase price to the fair value of the acquired
assets is as follows: equipment, $0.1 million, favorable lease, $0.1 million,
and goodwill, $8.2 million. Results of operations of the Las Vegas restaurants
are included in the Company’s financial statements beginning as of the
acquisition date.




In August
and September of 2007, the Company sold eight restaurants to franchisees for a
total of $7.5 million. These restaurants had an aggregate net book value of $1.6
million, and after a write off of goodwill of $8.8 million, which was the
proportionate share of goodwill attributable to the eight restaurants, and a
liability reduction of $0.1 million, the Company realized a $2.8 million loss
that is included in other operating expenses in the accompanying 2007
consolidated statement of operations.





On
September 24, 2009, EPL purchased four El Pollo Loco restaurants located in the
Atlanta, Georgia area previously owned and operated by an EPL franchisee, Fiesta
Brands, Inc., and related assets , and assumed various operating contracts,
including the leases, relating to the four purchased restaurants.  EPL
will continue to operate the four purchased restaurants. EPL also purchased
furniture, fixtures and equipment of five other El Pollo Loco restaurants
previously operated by Fiesta Brands, Inc. which have been closed. The purchase
price of $1.7 million consisted of cash and was accounted for using the purchase
method of accounting in accordance with Accounting Standards Codification
(“ASC”) 805-10, Business Combinations. The Company’s allocation of the purchase
price to the fair value of the acquired assets was as follows: equipment, $0.4
million and building and leasehold improvements, $1.3 million. Results of
operations of the Atlanta restaurants are included in the Company’s financial
statements beginning as of the acquisition date.  Fiesta Brands, Inc. is an
affiliate of the Company’s principal stockholders and certain Company
directors.





5.
PREPAID EXPENSES AND OTHER CURRENT ASSETS




Prepaid
expenses and other current assets consist of the following (in
thousands):




December 31,
                      2008
                    
                    
                    December 30,
                      2009Prepaid
      rent
                    
                    $
                    1,573
                    
                    
                    $
                    1,641Other
                    
                    
                    3,062
                    
                    
                    
                    3,617$
                    4,635
                    
                    
                    $
                    5,258





6.
PROPERTY




The costs
and related accumulated depreciation and amortization of major classes of
property as of December 31, 2008 and December 30, 2009 are as follows (in
thousands):




December 31,
                    2008
                  
                  
                  December 30,
                    2009Property
      owned:Land
                  
                  $
                  12,453
                  
                  
                  $
                  12,453Buildings
      and improvements
                  
                  
                  63,946
                  
                  
                  
                  66,137Other
      property and equipment
                  
                  
                  34,660
                  
                  
                  
                  35,958Construction
      in progress
                  
                  
                  3,415
                  
                  
                  
                  2,230Total
                  
                  
                  114,474
                  
                  
                  
                  116,778Accumulated
      depreciation and amortization
                  
                  
                  (30,153
                  )
                  
                  
                  (39,434
                  )Property
      owned—net
                  
                  $
                  84,321
                  
                  
                  $
                  77,344Property
      held under capital leases
                  
                  $
                  2,015
                  
                  
                  $
                  1,976Accumulated
      amortization
                  
                  
                  (1,283
                  )
                  
                  
                  (1,452
                  )Property
      held under capital leases—net
                  
                  $
                  732
                  
                  
                  $
                  524




F-40




Property
held under capital leases consists principally of buildings and improvements.
The total depreciation and amortization expense for property for the years ended
December 26, 2007, December 31, 2008 and December 30, 2009, was approximately
$11,195,000, $11,949,000 and $10,883,000 respectively.





7.
GOODWILL AND OTHER INTANGIBLE ASSETS AND LIABILITIES




Changes
in goodwill consist of the following (in thousands):




December 31,
                          2008
                        
                        
                        December 30,
                          2009Beginning
      balance
                        
                        $
                        274,417
                        
                        
                        $
                        274,417Accumulated
      impairment losses
                        
                        
                        -
                        
                        
                        
                        (24,493
                        )Goodwill
      impairment loss recorded during the year
                        
                        
                        (24,493
                        )
                        
                        
                        -Ending
      balance
                        
                        $
                        249,924
                        
                        
                        $
                        249,924




Other
intangible assets subject to amortization consist of the following (in
thousands):




December 31,
                                2008
                              
                              
                              December 30,
                                2009Franchise
      network—net
                              
                              $
                              6,575
                              
                              
                              $
                              -Favorable
      leasehold interest—net
                              
                              
                              2,582
                              
                              
                              
                              1,900O
      Other intangible assets—net
                              
                              $
                              9,157
                              
                              
                              $
                              1,900Unfavorable
      leasehold interest liability—net
                              
                              $
                              (4,883
                              )
                              
                              $
                              (3,998
                              )Intangible
      assets not subject to amortization: domestic trademark
                              
                              $
                              103,000
                              
                              
                              $
                              91,788








Due to
the downturn in the economy and its effect on expected future cash flows in
fiscal 2008, the Company recorded a non-cash impairment of goodwill of $24.5
million and recorded a non-cash impairment of domestic trademarks of $17.6
million in accordance with the evaluation described below.  Based on
the Company’s analysis described below, in fiscal 2009, the
Company recorded a non-cash full impairment of $6.1 million for our
franchise network and recorded a non-cash impairment of domestic trademarks of
$11.3 million.





The
evaluation of the carrying amount of other intangible assets with indefinite
lives is made annually coinciding with the Company's fiscal year-end by
comparing the carrying amount of these assets to their estimated fair value. The
estimated fair value is generally determined on the basis of discounted future
cash flows. If the estimated fair value is less than the carrying amount of the
other intangible assets with indefinite lives, then an impairment charge is
recorded to reduce the asset to its estimated fair value.





The
impairment evaluation for goodwill is conducted annually coinciding with the
Company’s fiscal year-end using a two-step process. In the first step, the fair
value of the company-owned restaurants, treated as a single reporting unit, is
compared with the carrying amount of the reporting unit, including goodwill. The
estimated fair value of the reporting unit is generally determined on the basis
of discounted future cash flows or in consideration of recent transactions
involving stock sales with independent third parties. If the estimated fair
value of the reporting unit is less than the carrying amount of the reporting
unit, a second step must be completed in order to determine the amount of the
goodwill impairment that should be recorded. In the second step, the implied
fair value of the reporting unit’s goodwill is determined by allocating the
reporting unit’s fair value to all of its assets and liabilities other than
goodwill (including any unrecognized intangible assets) in a manner similar to a
purchase price allocation. The resulting implied fair value of the goodwill that
results from the application of this second step is then compared with the
carrying amount of the goodwill and an impairment charge is recorded for the
difference.




The
assumptions used in the estimate of fair value are generally consistent with the
past performance of the Company’s reporting unit and are also consistent with
the projections and assumptions that are used in current operating plans. These
assumptions are subject to change as a result of changing economic and
competitive conditions.


F-41





Amortization
expense for the franchise network was $457,000 for each of the years ended
December 26, 2007, December 31, 2008 and December 30, 2009,
respectively.





Favorable
leasehold interest represents the asset in excess of the approximate fair market
value of the leases assumed as of November 18, 2005, the date of the
Acquisition. The amount is being reduced over the approximate average life of
the leases.




Unfavorable
leasehold interest liability represents the liability in excess of the
approximate fair market value of the leases assumed as of November 18, 2005, the
date of the Acquisition. The amount is being reduced over the approximate
average life of the leases.  This amount is shown as other intangible
liabilities-net on the balance sheet.




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 December 302009
                  
                  $
                  (327
                  )2010
                  
                  
                  (290
                  )2011
                  
                  
                  (275
                  )2012
                  
                  
                  (213
                  )2013
                  
                  
                  (227
                  )





8.
OTHER ASSETS




Other
assets consist of the following (in thousands):




December 31,
                    2008
                  
                  
                  December 30,
                    2009Deferred
      financing costs – net
                  
                  $
                  4,973
                  
                  
                  $
                  10,723Other
                  
                  
                  1,011
                  
                  
                  
                  1,206$
                  5,984
                  
                  
                  $
                  11,929




Amortization
expense for deferred financing costs was $1,317,000, $1,299,000 and $3,424,000
for the years ended December 26, 2007, December 31, 2008 and December 30, 2009,
respectively.




9.
LEASES




The
Company’s operations utilize property, facilities, equipment and vehicles owned
by the Company or leased from others. Buildings and facilities leased from
others are primarily for restaurants and support facilities. Restaurants are
operated under lease arrangements that generally provide for a fixed base rent
and, in some instances, contingent rent based on a percentage of gross operating
profit or gross revenues in excess of a defined amount. Initial terms of land
and restaurant building leases generally are not less than 20 years, exclusive
of options to renew. Leases of equipment primarily consist of restaurant
equipment, computer systems and vehicles. The Company subleases facilities to
certain franchisees and other non-related parties which are recorded on a
straight-line basis.




Information
regarding the Company’s future lease obligations at December 30, 2009 is as
follows (in thousands):




Capital Leases
                  
                  
                  Operating LeasesYear Ending December 30
                  
                  Minimum
                    Lease
                    Payments
                  
                  
                  Minimum
                    Sublease
                    Rentals
                  
                  
                  Minimum
                    Lease
                    Payments
                  
                  
                  Minimum
                    Sublease
                    Rentals2010
                  
                  $
                  627
                  
                  
                  $
                  225
                  
                  
                  $
                  17,952
                  
                  
                  $
                  1,6802011
                  
                  
                  457
                  
                  
                  
                  115
                  
                  
                  
                  16,624
                  
                  
                  
                  1,4622012
                  
                  
                  436
                  
                  
                  
                  115
                  
                  
                  
                  15,637
                  
                  
                  
                  1,2052013
                  
                  
                  417
                  
                  
                  
                  115
                  
                  
                  
                  13,749
                  
                  
                  
                  7862014
                  
                  
                  416
                  
                  
                  
                  115
                  
                  
                  
                  11,687
                  
                  
                  
                  316Subsequent
      years
                  
                  
                  1,198
                  
                  
                  
                  170
                  
                  
                  
                  83,673
                  
                  
                  
                  550Total
                  
                  $
                  3,551
                  
                  
                  $
                  855
                  
                  
                  $
                  159,322
                  
                  
                  $
                  5,999Less
      imputed interest
                  
                  
                  (1,447
                  )Present
      value of capital lease obligations
                  
                  
                  2,104Less
      current maturities
                  
                  
                  (341
                  )Noncurrent
      portion
                  
                  $
                  1,763




F-42




Net rent
expense for the years ended December 26, 2007, December 31, 2008 and December
30, 2009 is as follows (in thousands):




Year EndedDecember 26,
                    2007
                  
                  
                  December 31,
                    2008
                  
                  
                  December 30,
                    2009Base
      rent
                  
                  $
                  17,246
                  
                  
                  $
                  18,159
                  
                  
                  $
                  18,938Contingent
      rent
                  
                  
                  630
                  
                  
                  
                  683
                  
                  
                  
                  473Less
      sublease income
                  
                  
                  (4,316
                  )
                  
                  
                  (4,155
                  )
                  
                  
                  (3,779
                  )Net
      rent expense
                  
                  $
                  13,560
                  
                  
                  $
                  14,687
                  
                  
                  $
                  15,632




Base rent
and contingent rent are included in other operating expenses, while sublease
income is included in franchise revenue in the accompanying consolidated
statements of operations. Sublease income includes contingent rental income of
$2,060,000, $2,071,000 and $1,596,000 for the years ended December 26, 2007,
December 31, 2008 and December 30, 2009, respectively.




In
addition to the sublease income described above, the Company is a lessor for
certain property, facilities and equipment owned by the Company and leased to
others, principally franchisees, under noncancelable leases with initial terms
ranging from three to nine years. The lease agreements generally provide for a
fixed base rent and, in some instances, contingent rent based on a percentage of
gross operating profit or gross revenues. Total rental income, included in
franchise revenue in the accompanying consolidated statements of operations, for
leased property was $414,000, $360,000 and $308,000 for the years ended December
26, 2007, December 31, 2008 and December 30, 2009, respectively.




Minimum
future rental income for company-owned properties under noncancelable operating
leases, which is recorded on a straight-line basis, in effect as of December 30,
2009 is as follows (in thousands):




Year Ending December 302010
                  
                  $
                  2092011
                  
                  
                  1662012
                  
                  
                  1662013
                  
                  
                  1662014
                  
                  
                  82Thereafter
                  
                  
                  98Total
      future minimum rental income
                  
                  $
                  887




10.
SENIOR SECURED NOTES (2009 Notes)




In
December 2003, EPL issued notes, consisting of $110.0 million of senior
secured notes (the “2009 Notes”) accruing interest at 9.25% per annum due
December 2009. In May of 2009, the Company repurchased, at par, the remaining
outstanding $250,000 balance of these 2009 Notes.





11.
SENIOR SECURED NOTES (2012 Notes)




On May
22, 2009, EPL issued $132,500,000 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 $129,850,000
before expenses and fees.  At December 30, 2009, the Company had
$130.4 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
December 30, 2009, EPL does not meet the fixed charge coverage ratio.
Accordingly, EPL is not permitted to incur additional indebtedness. A failure to
comply with the covenants affects only EPL’s ability to incur additional
indebtedness and does not constitute a default under the 2012
Notes.


F-43




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 balance sheets, and the
related amortization is reflected as a component of interest expense in the
accompanying consolidated statement of operations. The Company used the net
proceeds from the 2012 Notes to repay the credit facility with Merrill
Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated and Bank
of America, N.A. (see Note 13) and its 2009 Notes (see Note 10), 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.





12.
SENIOR UNSECURED NOTES PAYABLE (2013 Notes)




EPL has
outstanding 2013 notes, consisting of $106.3 million aggregate principal amount
of 113⁄4% senior notes due 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 the discretion of the issuer, after
November 15, 2009. 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, among other
items.





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 balance
sheets, and the related amortization is reflected as a component of interest
expense in the accompanying consolidated financial statements. The Company used
the proceeds from the 2013 Notes to purchase substantially all of the
outstanding 2009 Notes (Note 10).




The
Company purchased $15.9 million in principal amount of these Notes at a price of
$13.6 million at various times in 2008.  The net purchase price was
86% of the principal amount of such notes and resulted in a net gain of $1.6
million which is included in other income in the consolidated statement of
operations.  The gain of $1.6 million is net of the write-off of
prorated deferred finance costs of $0.6 million.





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 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.





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 (see
Note 11) have restrictions that limit distributions or dividends that may be
paid by EPL to Intermediate. Conditions that would allow for distributions or
dividends to be made include compliance with a fixed charge coverage ratio test
(as defined in the applicable indentures) and cash received from the proceeds of
new equity contributions. As of December 30, 2009, EPL is restricted from
incurring additional indebtedness, as it does not currently meet the 2.0 to
1 fixed charge coverage ratio required under its 2012 and 2013 Notes. This
restriction does not apply to the existing loan availability of $6.2 million
under the revolving line of credit. There are also some allowed distributions,
payments and dividends for other specific events. Distributions, dividends or
investments would also be limited to 50% of consolidated net income under
certain circumstances.




13.
NOTES PAYABLE TO MERRILL LYNCH, BANK OF AMERICA, ET AL AND REVOLVING CREDIT
FACILITY




On
November 18, 2005, EPL entered into a senior secured credit facility with
Intermediate, as parent guarantor, Merrill Lynch Capital Corporation, as
administrative agent, the other agents identified therein, Merrill Lynch &
Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated and Bank of America,
N.A., as lead arrangers and book managers, and a syndicate of financial
institutions and institutional lenders. The credit facility provided for a
$104.5 million term loan and $25.0 million in revolving availability. The
Company repaid the credit facility in full in May 2009 with the proceeds of the
2012 Notes and replaced the revolving loan with the new credit facility
described in Note 14.


F-44




The
credit facility bore interest, payable quarterly, at a Base Rate as defined in
the credit facility or LIBOR, at EPL’s option, plus an applicable margin. The
applicable margin was based on EPL’s financial performance, as defined in the
credit facility. The applicable margin rate for the term loan remained constant
at 2.50% with respect to LIBOR and at 1.50% with respect to Base Rate. See below
for the interest rates on the portion of the term loan represented by an
interest rate swap. The credit facility was secured by a first-priority pledge
by Holdings of all of the outstanding stock of Intermediate, a first priority
pledge by Intermediate of all of EPL’s outstanding stock and a first
priority security interest in substantially all of EPL’s tangible and intangible
assets. In addition, the credit facility was guaranteed by Intermediate and
Holdings.




The
credit facility required the prepayment of the term loan in an amount equal to
50% of Excess Operating Cash Flow if, at the end of the fiscal year, the
Consolidated Leverage Ratio was less than 5.0:1.0. Excess Operating Cash Flow
was defined as an amount equal to Consolidated EBITDA minus Consolidated
Financial Obligations and other specific payments and adjustments. The Excess
Operating Cash Flow for 2008 was $9.4 million. The Company made the required
prepayment of $4.7 million in April 2009.




In the
past, to help mitigate risk, we entered into an interest rate swap agreement.
The agreement was terminated in the second quarter of 2009. The interest rate
swap agreement was intended to reduce interest rate risk associated with
variable interest rate debt. The Company had $0.2 million in expense for the
year ended December 30, 2009, related to the change in the fair value of the
interest rate swap agreement.




14.
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 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. Utilizing
the Credit Facility, $6.3 million of letters of credit were issued and
outstanding as of December 30, 2009.




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 December 30, 2009, 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.





15.
OTHER ACCRUED EXPENSES AND CURRENT LIABILITIES




Other
accrued expenses and current liabilities consist of the following (in
thousands):




December 31,
                    2008
                  
                  
                  December 30,
                    2009Accrued
      sales and property taxes
                  
                  $
                  3,435
                  
                  
                  $
                  2,852Other
                  
                  
                  5,915
                  
                  
                  
                  5,435$
                  9,350
                  
                  
                  $
                  8,287





16.
OTHER NONCURRENT LIABILITIES




Other
noncurrent liabilities consist of the following (in thousands):


F-45




December 31,
                    2008
                  
                  
                  December 30,
                    2009Fair
      value of interest rate swap
                  
                  $
                  2,048
                  
                  
                  $
                  -Deferred
      rent
                  
                  
                  6,314
                  
                  
                  
                  7,311Workers’
      compensation reserve
                  
                  
                  2,674
                  
                  
                  
                  1,816Other
                  
                  
                  1,796
                  
                  
                  
                  1,546$
                  12,832
                  
                  
                  $
                  10,673





The
Company leases its facilities under various operating lease agreements. Certain
provisions of these leases provide for graduated rent payments and landlord
contributions. The Company recognizes rent expense on a straight-line basis over
the lease term. The cumulative difference between such rent expense and actual
payments to date is reflected as deferred rent. Landlord contributions are also
included in deferred rent and are amortized as a reduction of rent expense
ratably over the lease term.




17.
INCOME TAXES




The
provision (benefit) for income taxes is based on the following components (in
thousands):





Year EndedDecember 26,
                                  
                                  
                                  December 31,
                                  
                                  
                                  December 30,2007
                                  
                                  
                                  2008
                                  
                                  
                                  2009Current
      income taxes:Federal
                                  
                                  $
                                  2,562
                                  
                                  
                                  $
                                  22
                                  
                                  
                                  $
                                  -State
                                  
                                  
                                  23
                                  
                                  
                                  
                                  47
                                  
                                  
                                  
                                  782,585
                                  
                                  
                                  
                                  69
                                  
                                  
                                  
                                  78Deferred
      income taxes:Federal
                                  
                                  
                                  1,031
                                  
                                  
                                  
                                  (7,897
                                  )
                                  
                                  
                                  6,707State
                                  
                                  
                                  1,576
                                  
                                  
                                  
                                  (2,756
                                  )
                                  
                                  
                                  9652,607
                                  
                                  
                                  
                                  (10,653
                                  )
                                  
                                  
                                  7,672$
                                  5,192
                                  
                                  
                                  $
                                  (10,584
                                  )
                                  
                                  $
                                  7,750





A
reconciliation of the provision (benefit) for income taxes to the amount of
income tax expense that would result from applying the federal statutory rate to
income before provision (benefit) for income taxes is as follows (in
thousands):


F-46





Year
       EndedDecember 26,
                                  
                                  
                                  December 31,
                                  
                                  
                                  December 30,2007
                                  
                                  
                                  2008
                                  
                                  
                                  2009Provision
      (benefit) for income taxes at statutory rate
                                  
                                  $
                                  1,123
                                  
                                  
                                  $
                                  (16,691
                                  )
                                  
                                  $
                                  (11,424
                                  )State
      income taxes-net of federal income tax benefit
                                  
                                  
                                  1,039
                                  
                                  
                                  
                                  (1,739
                                  )
                                  
                                  
                                  (1,811
                                  )Non-deductible
      goodwill
                                  
                                  
                                  2,785
                                  
                                  
                                  
                                  7,738
                                  
                                  
                                  
                                  -Valuation
      allowance
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  21,035Other
                                  
                                  
                                  245
                                  
                                  
                                  
                                  108
                                  
                                  
                                  
                                  (50
                                  )$
                                  5,192
                                  
                                  
                                  $
                                  (10,584
                                  )
                                  
                                  $
                                  7,750





Deferred
income tax assets and liabilities are recorded for differences between the
financial statement and tax basis of the assets and liabilities that will result
in taxable or deductible amounts in the future based on enacted laws and rates
applicable to the periods in which the differences are expected to affect
taxable income.  Valuation allowances are established when necessary
to reduce deferred tax assets to the amount expected to be
realized.





The
Company’s deferred income tax assets and liabilities consist of the following
(in thousands):


F-47





December 31,
                  
                  
                  December 30,2008
                  
                  
                  2009Capital
      leases
                  
                  $
                  845
                  
                  
                  $
                  671Accrued
      vacation
                  
                  
                  727
                  
                  
                  
                  646Accrued
      legal
                  
                  
                  -
                  
                  
                  
                  4,628Deferred
      rent
                  
                  
                  5,687
                  
                  
                  
                  4,033Accrued
      workers' compensation
                  
                  
                  1,516
                  
                  
                  
                  973Enterprise
      zone and other credits
                  
                  
                  505
                  
                  
                  
                  605State
      taxes
                  
                  
                  17
                  
                  
                  
                  9Net
      operating losses
                  
                  
                  5,601
                  
                  
                  
                  7,893Interest
      expense
                  
                  
                  880
                  
                  
                  
                  -Other
                  
                  
                  5,757
                  
                  
                  
                  6,990Deferred
      income tax assets
                  
                  
                  21,535
                  
                  
                  
                  26,448Less:
      valuation allowance
                  
                  
                  -
                  
                  
                  
                  (21,035
                  )Net deferred
      tax assets
                  
                  
                  21,535
                  
                  
                  
                  5,413Goodwill
                  
                  
                  (1,610
                  )
                  
                  
                  (2,607
                  )Trademark
                  
                  
                  (40,471
                  )
                  
                  
                  (36,046
                  )Prepaid
      expense
                  
                  
                  (1,353
                  )
                  
                  
                  (1,422
                  )Basis
      difference in fixed assets
                  
                  
                  (5,302
                  )
                  
                  
                  (2,189
                  )Other
                  
                  
                  (2,576
                  )
                  
                  
                  (598
                  )Deferred
      income tax liabilities
                  
                  
                  (51,312
                  )
                  
                  
                  (42,862
                  )Net
      deferred income tax liability
                  
                  
                  (29,777
                  )
                  
                  
                  (37,449
                  )





The
Company has evaluated the available evidence supporting the realization of its
gross deferred tax assets, including the amount and timing of future taxable
income, and has determined it is more likely than not that the assets will not
be realized.  Due to uncertainties surrounding the realizability of
the deferred tax assets, the Company recorded a full valuation allowance
against its definite lived net deferred tax assets during the year
ended December 30, 2009.  The tax effect of recording a valuation
allowance resulted in tax expense for the year ended December 30, 2009 of
$21.0 million recognized in the statements of
operations.




As of
December 30, 2009, the Company has federal and state net operating loss
carryforwards of approximately $16.9 million and $25.1 million, respectively,
which expire beginning in 2025 and 2014, respectively. The Company also has
enterprise zone credits and alternative minimum tax credits of approximately
$351,000 and $225,000, respectively, which carryforward indefinitely.




The
utilization of net operating loss carryforwards may be subject to limitations
under provision of the Internal Revenue Code Section 382 and similar state
provisions.




On
December 28, 2006, the Company adopted the provisions of FIN 48, Accounting for Uncertainty in Income
Taxes, now ASC 740 “Income Taxes” which clarifies the accounting for
uncertain tax positions. ASC 740 requires that the Company recognize the impact
of a tax position in the financial statements if the position is more
likely than not of being sustained upon examination and on the technical merits
of the position. The impact of the adoption of ASC 740 was immaterial to the
Company’s consolidated financial statements.  As of December 30, 2009,
the Company has no material unrecognized tax benefits.





A
reconciliation of the beginning and ending balance of unrecognized tax benefits
is as follows:




Balance
      at December 27, 2006
                    
                    $
                    -Additions
      based on tax positions related to the current year
                    
                    
                    2,098,000Balance
      at December 26, 2007
                    
                    $
                    2,098,000Gross
      decreases – tax positions in prior period
                    
                    
                    (1,356,000)Balance
      at December 31, 2008
                    
                    $
                    742,000Gross
      decreases - tax positions in prior period
                    
                    
                    (742,000
                    )Balance
      at December 30, 2009
                    
                    $
                    -


F-48


The
Company does not anticipate any material change in the total amount of
unrecognized tax benefits to occur within the next twelve months.





ASC 740
requires the Company to accrue interest and penalties where there is an
underpayment of taxes based on the Company’s best estimate of the amount
ultimately to be paid. The Company’s policy is to recognize interest accrued
related to unrecognized tax benefits and penalties as income tax expense. The
Company has no uncertain tax positions as of December 30, 2009, consequently no
interest or penalties have been accrued by the Company.





The
Company is subject to taxation in the U.S. and various state jurisdictions. The
Company is no longer subject to U.S. examination for years before 2005, and
years before 2004 by state taxing authorities.





18.
EMPLOYEE BENEFIT PLANS




The
Company sponsors a defined contribution employee benefit plan that permits its
employees, subject to certain eligibility requirements, to contribute up to 25%
of their qualified compensation to the plan. The Company matches 100% of the
employees’ contributions of the first 3% of the employees’ annual qualified
compensation, and 50% of the employees’ contributions of the next 2% of the
employees’ annual qualified compensation. The Company’s matching contribution
immediately vests 100%. The Company’s contributions to the plan for the years
ended December 26, 2007, December 31, 2008 and December 30, 2009, were
approximately $416,000, $551,000 and $467,000, respectively.




19.
STOCK-BASED COMPENSATION




As of
December 26, 2007, December 31, 2008 and December 30, 2009, options to purchase
304,287, 307,556 and 289,217 shares, respectively, of common stock of CAC were
outstanding. Included in that amount are 65,740 options that are fully vested;
the remaining options partially vest upon the Company’s attaining annual
financial goals, with the remaining unvested portion vesting on the sixth or
seventh anniversary of the grant date, and vest 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 at fair value on the date of grant.




Changes
in stock options for the years ended December 26, 2007, December 31, 2008 and
December 30, 2009 are as follows:




Shares
                  
                  
                  Weighted-
                    Average
                    Exercise Price
                  
                  
                  Weighted-
                    Average
                    Remaining
                    Contractual
                    Life
                    (in Years)
                  
                  
                  Aggregate
                    Intrinsic
                    ValueOutstanding—December
      27, 2006
                  
                  
                  302,772
                  
                  
                  $
                  66.58Grants
      (weighted-average fair value of $49.95 per share)
                  
                  
                  22,246
                  
                  
                  $
                  113.29Exercised
                  
                  
                  (709
                  )
                  
                  $
                  10.39
                  
                  
                  
                  
                  
                  $ 66,426Canceled
                  
                  
                  (20,022
                  )
                  
                  $
                  88.93Outstanding—December
      26, 2007
                  
                  
                  304,287
                  
                  
                  $
                  68.65Grants
      (weighted-average fair value of $42.14 per share)
                  
                  
                  4,449
                  
                  
                  $
                  109.07Exercised
                  
                  
                  (1,180
                  )
                  
                  $
                  20.60
                  
                  
                  
                  
                  
                  $107,286Canceled
                  
                  
                  -
                  
                  
                  $Outstanding—December
      31, 2008
                  
                  
                  307,556
                  
                  
                  $
                  69.42Grants
      (weighted-average fair value of $28.29 per share)
                  
                  
                  15,573
                  
                  
                  $
                  68.00Exercised
                  
                  
                  (13,911
                  )
                  
                  $
                  5.97
                  
                  
                  
                  
                  
                  
                  $
                  881,370Canceled
                  
                  
                  (20,001
                  )
                  
                  $
                  86.43Outstanding—December
      30, 2009
                  
                  
                  289,217
                  
                  
                  $
                  71.22
                  
                  
                  
                  5.5
                  
                  
                  $
                  2,425,806Vested
      and expected to vest in the future - December 30, 2009
                  
                  
                  285,688
                  
                  
                  $
                  71.22
                  
                  
                  
                  5.5
                  
                  
                  $
                  2,425,806Exercisable
      - December 30, 2009
                  
                  
                  65,740
                  
                  
                  $
                  9.10
                  
                  
                  
                  2.0
                  
                  
                  $
                  2,425,806




Outstanding
stock options at December 30, 2009 are summarized as follows:


F-49




Range of
                      Exercise Prices
                    
                    Number
                      Outstanding
                    
                    
                    Weighted-
                      Average
                      Remaining
                      Contractual Life
                      (in Years)
                    
                    
                    Weighted-
                      Average
                      Exercise Price
                    
                    
                    Number
                      Exercisable
                    
                    
                    Weighted-
                      Average
                      Exercise Price$
                    2.98
                    
                    
                    6,307
                    
                    
                    
                    0.3
                    
                    
                    $
                    2.98
                    
                    
                    
                    6,307
                    
                    
                    $
                    2.98$
                    7.56
                    
                    
                    24,026
                    
                    
                    
                    1.3
                    
                    
                    $
                    7.56
                    
                    
                    
                    24,026
                    
                    
                    $
                    7.56$
                    9.68-$11.77
                    
                    
                    32,365
                    
                    
                    
                    2.7
                    
                    
                    $
                    10.68
                    
                    
                    
                    32,365
                    
                    
                    $
                    10.68$
                    15.48-$20.60
                    
                    
                    3,042
                    
                    
                    
                    5.0
                    
                    
                    $
                    17.11
                    
                    
                    
                    3,042
                    
                    
                    $
                    17.11$
                    68.00
                    
                    
                    15,573
                    
                    
                    
                    9.7
                    
                    
                    $
                    68.00
                    
                    
                    
                    —
                    
                    
                    $
                    —$
                    86.43
                    
                    
                    169,057
                    
                    
                    
                    6.0
                    
                    
                    $
                    86.43
                    
                    
                    
                    —
                    
                    
                    $
                    —$
                    108.84-$117.75
                    
                    
                    38,847
                    
                    
                    
                    7.3
                    
                    
                    $
                    111.44
                    
                    
                    
                    —
                    
                    
                    $
                    —289,217
                    
                    
                    
                    5.5
                    
                    
                    $
                    71.22
                    
                    
                    
                    65,740
                    
                    
                    $
                    9.10




The
intrinsic value is calculated as the difference between the market value as of
December 30, 2009 and the exercise price of the options outstanding and options
exercisable.




Options
are accounted for as follows:




Variable Accounting:
Options granted on December 15, 2005 provide that, in the event of a successful
completion of an initial public offering of at least $50 million before November
18, 2007, 50% of the then unvested options would have vested immediately upon
consummation of the offering. The remaining unvested options would have
automatically terminated and the optionees would have been entitled to receive
restricted stock with an aggregate economic value equal to the fair market value
(measured at the close of business of the first day of public trading) of the
shares into which the terminated unvested options were exercisable minus the
aggregate exercise price of such options. Upon a change in control of CAC, or if
the initial public offering occurs after November 18, 2007, 100% of the options
granted will vest immediately.




For
options granted on December 15, 2005 that would have been cancelled and replaced
with restricted stock upon completion of an initial public offering before
November 18, 2007, the Company used variable accounting to recognize expense
based on the change in incremental value of the award at each reporting period
until November 18, 2007. As the Company did not undertake an initial public
offering prior to November 18, 2007, the future compensation expense is
calculated based on the intrinsic value of the award as of that date.
Compensation expense of $381,000, $307,000 and $162,000  was
recognized for the years ended December 26, 2007, December 31, 2008 and December
30, 2009, respectively, related to such options. As of December 30, 2009, the
total unamortized compensation expense related to these options was
approximately $0.8 million, which will be amortized over the remaining vesting
period of approximately 3.0 years, or earlier in the event of an initial public
offering of our common stock or a change in control.




ASC 718 “Compensation-Stock
Compensation”; previously FASB Statement No. 123(R): ASC 718 requires
companies to expense the estimated fair value of employee stock options and
similar awards based on the grant-date fair value of the award. The cost is
recognized on a straight-line basis over the period during which an employee is
required to provide service in exchange for the award, usually the vesting
period. The Company adopted the provisions of ASC 718 on December 29, 2005 using
a prospective application. Under the prospective application, ASC 718 applies to
new awards and any awards that are modified or cancelled subsequent to the date
of adoption of ASC 718. Prior periods are not revised for comparative purposes.
Because the Company used the minimum value method for its pro forma disclosures
under ASC 718, options granted prior to December 29, 2005 will continue to be
accounted for in accordance with APB Opinion No. 25 unless such options are
modified, repurchased or cancelled after December 29, 2005.




In order
to meet the fair value measurement objective, the Company utilizes the
Black-Scholes option-pricing model to value compensation expense for share-based
awards granted beginning in 2006 and developed estimates of various inputs
including forfeiture rate, expected term life, expected volatility, and
risk-free interest rate. The forfeiture rate is based on historical rates and
reduces the compensation expense recognized. The expected term of options
granted is derived from the simplified method per ASC 718-10-30. The risk-free
interest rate is based on the implied yield on a U.S. Treasury constant maturity
with a remaining term equal to the expected term of the Company’s employee stock
options. Expected volatility is based on the comparative industry entity data.
The Company does not anticipate paying any cash dividends in the foreseeable
future and therefore uses an expected dividend yield of zero for option
valuation.




The
weighted-average estimated fair value of employee stock options granted during
the year ended December 30, 2009 was $28.29 per share using the Black-Scholes
model with the following weighted-average assumptions used to value the option
grants: Expected volatility of 31%; Expected term life - 7.0 years; Forfeiture
rate - 1.22%; Risk-free interest rates - 3.0%; and Expected dividends -
0%.


F-50





The
weighted-average estimated fair value of employee stock options granted during
the year ended December 31, 2008 was $42.14 per share using the Black-Scholes
model with the following weighted-average assumptions used to value the option
grants: Expected volatility of 31%; Expected term life - 7.0 years; Forfeiture
rate - 1.22%; Risk-free interest rates -3.0%; and Expected dividends -
0%.




The
weighted-average estimated fair value of employee stock options granted during
the year ended December 26, 2007 was $49.95 per share using the Black-Scholes
model with the following weighted-average assumptions used to value the option
grants: Expected volatility of 32%; Expected term life - 7.0 years; Forfeiture
rate - 1.22%; Risk-free interest rates ranged from 4.5% to 5.0%; and Expected
dividends - 0%.





During
the years ended December 26, 2007, December 31, 2008 and December 30, 2009, the
Company recognized share-based compensation expense before tax of $373,000,
$404,000 and $406,000, respectively, related to stock option grants after
December 28, 2005. These expenses were included in other operating expenses
consistent with the salary expense for the related optionees.





Upon
consummation of an initial public offering of at least $50 million or a change
in control of CAC, the Company would incur compensation expense related to the
immediate vesting of the unvested portion of certain options. The expense will
be determined by calculating the unrecognized compensation cost as of the date
of the completion of the offering or the change in control.




As of
December 30, 2009, there was total unrecognized compensation expense of $2.8
million related to unvested stock options which the Company expects to recognize
over a weighted average period of 3.5 years.





In
October 2008, the Board of Directors of CAC adopted a Restricted Stock Plan
pursuant to which up to an aggregate of 5,000 shares of CAC common stock may be
awarded to independent directors as compensation for their
services.  No restricted stock awards were granted in
2008.  For fiscal 2009, there was not a material restricted stock
expense.





20.
COMMITMENTS AND CONTINGENCIES





Legal
Matters




On or
about April 16, 2004, former managers Haroldo Elias, Marco Ramirez and Javier
Rivera filed a purported class action lawsuit in the Superior Court of the State
of California, County of Los Angeles, against EPL on behalf of all putative
class members (former and current general managers and restaurant managers from
April 2000 to present) alleging certain violations of California labor laws,
including alleged improper classification of general managers and restaurant
managers as exempt employees. Plaintiffs’ requested remedies include
compensatory damages for unpaid wages, interest, certain statutory penalties,
disgorgement of alleged profits, punitive damages and attorneys’ fees and costs
as well as certain injunctive relief. The parties reached an agreement to settle
this matter for $8 million which was accrued for in the fourth quarter of 2009
and is included in accounts payable within the accompanying balance sheet and
included in other operating expenses within the statement of
operations.  The Court has granted preliminary approval of the
classwide settlement and set a hearing for final approval on April 1,
2010.  We funded the settlement on January 14, 2010.




On or
about October 18, 2005, Salvador Amezcua, on behalf of himself and all others
similarly situated, filed a purported class action complaint against EPL in the
Superior Court of the State of California, County of Los Angeles. Carlos Olvera
replaced Mr. Amezcua as the named class representative on August 16, 2006. This
action alleges certain violations of California labor laws and the California
Business and Professions Code, based on, among other things, failure to pay
overtime compensation, failure to provide meal periods, unlawful deductions from
earnings and unfair competition. Plaintiffs’ requested remedies include
compensatory and punitive damages, injunctive relief, disgorgement of profits
and reasonable attorneys’ fees and costs.  This lawsuit was deemed
related to and was included as part of the Elias settlement discussed
above.




On
June 22, 2006, the Company filed a complaint for declaratory relief, breach of
written contract and bad faith against Arch Specialty Insurance Company
(Arch), seeking damages and equitable relief for Arch’s refusal to carry
out the obligations of its insurance contract to defend and indemnify, among
other things, the Company in the EPL-Mexico v. EPL-USA trademark litigation
settled in June 2008. The parties agreed to settle this matter for a payment by
Arch to the Company of $4.5 million which was  recorded as a
receivable as of December 30, 2009 and is included in accounts receivable
within the accompanying balance sheet and included in other operating expenses
within the statement of operations.  The basic terms of the agreement
were confirmed in late December 2009 and the settlement payment was received by
us on February 2, 2010.


F-51


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 $0.9 million and have executed a Memorandum of
Understanding. This amount was accrued for as of December 30, 2009 and is
included in accounts payable on our balance sheet and included in other
operating expenses within the statement of operations.  The Court
granted preliminary approval of the settlement on February 25, 2010, and the
parties currently await a formal court order setting the class notification
deadlines as well as the hearing for final court approval.




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 $1.5
million and have executed a Settlement Agreement. This amount was accrued for as
of December 30, 2009 and is included in accounts payable on the
Company's balance sheet and included in other operating expenses within the
statement of operations.   The Court granted preliminary approval
of the settlement on February 25, 2010, and the parties currently await a formal
court order setting the class notification deadlines as well as the hearing for
final court approval.





On or
about February 2, 2009, Sunset & Westridge, LLC, landlord of a restaurant
site in St. George, Utah, filed suit against EPL in Superior Court for the
County of Orange seeking declaratory relief for alleged breach of a commercial
lease.  Plaintiff alleged that the Company wrongfully terminated the lease
in question, citing force majeure delays as justification for missing the
delivery date on the property.  The parties agreed to settle this matter in
November 2009 for an immaterial amount which was paid in 2009 and the matter was
dismissed on January 15, 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 and will be included in that settlement.





In
September 2008, the excess insurance carrier in the settled Mexico trademark
litigation, American International Specialty Lines Insurance Company, 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 the underlying Mexico trademark litigation.  This
lawsuit was stayed pending the outcome of the Arch litigation described above,
and is set for trial starting April 12, 2010.





We are
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 company-operated restaurants and
franchised restaurants, respectively, 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 $5.8 million.





In March
2010, EPL executed a chicken supply contract with a vendor.  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 one year remaining
on contracts with certain other vendors for chicken. The estimated obligations
on those contracts are $23.6 million.




21.
RELATED PARTY TRANSACTIONS




On
November 18, 2005, CAC entered into a Monitoring and Management Services
Agreement with Trimaran Fund Management, L.L.C. (“Trimaran”), an affiliate of
the majority owner of CAC and of certain directors, which provides for annual
fees of $500,000 plus reasonable expenses. This Agreement was amended on
December 26, 2007 to add an affiliate of the FS Parties (see Note 2) as a party
to the Agreement. Such party shares in the fees payable under the Agreement.
During the years ended December 26, 2007, December 31, 2008 and December 30,
2009, $624,000, $525,000 and $588,000, respectively, was expensed pursuant to
this Agreement. These amounts are included in other operating expenses in the
accompanying consolidated statements of operations.


F-52


In
connection with our appeal of certain trademark litigation, EPL posted an appeal
bond in the amount of $24,301,450. A portion of the appeal bond was
collateralized by a $17,900,000 letter of credit arranged by Trimaran Fund II,
LLC (“Trimaran Fund”). Trimaran Fund is a 20.6% member of the LLC and an
affiliate of certain directors.  To compensate Trimaran Fund for this
accommodation, on December 19, 2007, EPL and CAC entered into two agreements
pursuant to which, among other things, EPL paid Trimaran Fund an up-front fee of
$536,000, representing 3% of the amount of the letter of credit, and EPL agreed
to reimburse Trimaran Fund for any amounts it paid in connection with the letter
of credit.   These agreements were terminated following the
settlement of this litigation and Trimaran Fund reimbursed EPL $277,000 of the
$536,000 up front fee.





On
September 24, 2009, EPL purchased four El Pollo Loco restaurants located in the
Atlanta, Georgia area previously owned and operated by an EPL franchisee, Fiesta
Brands, Inc., and related assets, and assumed various operating contracts,
including the leases, relating to the four purchased restaurants.  EPL will
continue to operate the four purchased restaurants. EPL also purchased
furniture, fixtures and equipment of five other El Pollo Loco restaurants
previously operated by Fiesta Brands, Inc. which have been closed. The purchase
price of $1.7 million consisted of cash and was accounted for using the purchase
method of accounting in accordance with Accounting Standards Codification
(“ASC”) 805-10, Business Combinations. The Company’s allocation of the purchase
price to the fair value of the acquired assets was as follows: equipment, $0.4
million and building and leasehold improvements, $1.3 million. Results of
operations of the Atlanta restaurants are included in the Company’s financial
statements beginning as of the acquisition date.  Fiesta Brands, Inc. is an
affiliate of the Company’s principal stockholders and certain Company
directors.





The
Company had receivables from affiliated entities of $221,000 and $308,000 as of
December 31, 2008 and December 30, 2009, respectively.





F-53




EXHIBIT INDEX





Exhibit No.
                        
                        Footnote
                        
                        Description2.1
                        
                        (18)
                        
                        Purchase
      Agreement, dated May 14, 2009, by and among El Pollo Loco, Inc., EPL
      Intermediate, Inc., as guarantor, and Jefferies & Company, Inc., as
      initial purchaser.3.1
                        
                        (2)
                        
                        Certificate
      of Incorporation of EPL Intermediate, Inc.3.2
                        
                        (13)
                        
                        Amended
      and Restated Bylaws of EPL Intermediate, Inc. as of October 7,
      20084.1
                        
                        (5)
                        
                        Indenture
      relating to the 2014 Notes, dated November 18, 2005, between EPL
      Intermediate, Inc. (as successor by merger to EPL Intermediate Finance
      Corp.) and The Bank of New York Trust Company, N.A.4.2
                        
                        (5)
                        
                        Form
      of 2014 Note (included as Exhibit A to Exhibit 4.1)4.3
                        
                        (5)
                        
                        Registration
      Rights Agreement relating to the 2014 Notes, dated November 18, 2005,
      among EPL Intermediate, Inc. (as successor by merger to EPL Intermediate
      Finance Corp.), Merrill Lynch, Pierce, Fenner & Smith Incorporated and
      Banc of America Securities LLC4.4
                        
                        (3)
                        
                        Indenture
      relating to the 2009 Notes, dated as of December 19, 2003, among El Pollo
      Loco, Inc., EPL Intermediate, Inc. and The Bank of New York, as
      Trustee4.5
                        
                        (5)
                        
                        Indenture
      relating to the 2013 Notes, dated November 18, 2005, among El Pollo Loco,
      Inc. (as successor by merger to EPL Finance Corp.), EPL Intermediate, Inc.
      and The Bank of New York Trust Company,
N.A.





4.6
                    
                    (5)
                    
                    Registration
      Rights Agreement relating to the 2013 Notes, dated November 18, 2005,
      among El Pollo Loco, Inc. (as successor by merger to EPL Finance Corp.),
      Merrill Lynch, Pierce, Fenner & Smith Incorporated and Banc of America
      Securities LLC4.7
                    
                    (6)
                    
                    Supplemental
      Indenture, dated November 2, 2005, between El Pollo Loco, Inc. and The
      Bank of New York as Trustee4.8
                    
                    (18)
                    
                    Indenture
      relating to the 2012 Notes, dated as of May 22, 2009, among El Pollo Loco,
      Inc., EPL Intermediate, Inc., as guarantor, and The Bank of New York
      Mellon Trust Company, N.A., as trustee4.9
                    
                    (18)
                    
                    Registration
      Rights Agreement relating to the 2012 Notes , dated as of May 22, 2009,
      among El Pollo Loco, Inc., EPL Intermediate, Inc., as guarantor, and
      Jefferies & Company, Inc., as initial purchaser.10.1
                    
                    (5)+
                    
                    Employment
      Agreement, dated September 27, 2005, between El Pollo Loco, Inc. and
      Stephen E. Carley10.2
                    
                    (5)+
                    
                    Employment
      Agreement, dated September 27, 2005, between El Pollo Loco, Inc. and
      Joseph Stein10.3
                    
                    (5)
      +
                    
                    Amendment
      No. 1 to Stein Employment Agreement, dated October 10, 2005, between El
      Pollo Loco, Inc. and Joseph Stein10.4
                    
                    (5)
      +
                    
                    Employment
      Agreement, dated November 1, 2005, between El Pollo Loco, Inc. and Brian
      Berkhausen10.5
                    
                    (5)
      +
                    
                    Employment
      Agreement, dated October 10, 2005, between El Pollo Loco, Inc. and Karen
      Eadon10.6
                    
                    (14)+
                    
                    Employment
      Agreement, dated June 28, 2007, between El Pollo Loco, Inc. and Jerry
      Lovejoy.10.7
                    
                    (14)+
                    
                    Personal
      Travel Stipend for Stephen Carley.10.8
                    
                    (5)
      +
                    
                    Employment
      Agreement, dated October 10, 2005, between El Pollo Loco, Inc. and Jeanne
      Scott10.9
                    
                    (5)
      +
                    
                    Employment
      Agreement, dated January 9, 2006, between El Pollo Loco, Inc. and Stephen
      Sather10.10
                    
                    (19)+
                    
                    Employment
      Agreement dated June 24, 2009 between El Pollo Loco, Inc. and Gary
      Campanaro10.11
                    
                    (13)+
                    
                    Chicken
      Acquisition Corp. 2008 Restricted Stock Plan for Directors and related
      Restricted Stock Award Agreement10.12
                    
                    (5)
      +
                    
                    Form
      of Exchange Stock Option Agreement, entered into between Chicken
      Acquisition Corp. and certain executive officers10.13
                    
                    (5)
      +
                    
                    Amendment
      No. 1 to Form of Exchange Stock Option Agreement, entered into between
      Chicken Acquisition Corp. and certain executive
  officers





10.14
                
                (5)
      +
                
                Amendment
      No. 2 to Form of Exchange Stock Option Agreement, entered into between
      Chicken Acquisition Corp. and certain executive
officers10.15
                
                (5)
      +
                
                Stockholders
      Agreement, dated November 18, 2005, among Chicken Acquisition Corp.,
      Trimaran Pollo Partners, LLC and other shareholders10.16
                
                (14)+
                
                Amendment
      No. 1 to Stockholders Agreement, dated on or about April 20, 2006,
      between Chicken Acquisition Corp. and Trimaran Pollo Partners,
      LLC.10.17
                
                (7)
                
                Second
      Amended and Restated Limited Liability Company Operating Agreement of
      Trimaran Pollo Partners, L.L.C., dated March 8, 2006, among affiliates of
      Trimaran Fund Management, L.L.C. and certain other third party
      investors10.18
                
                (5)
                
                Monitoring
      and Management Services Agreement, dated November 18, 2005, between
      Chicken Acquisition Corp. and Trimaran Fund Management,
    L.L.C.10.19
                
                (5)
                
                Credit
      Agreement, dated November 18, 2005, among El Pollo Loco, Inc., EPL
      Intermediate, Inc., Merrill Lynch Capital Corporation, Bank of America,
      N.A., Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith
      Incorporated, CIT Lending Services Corporation and the other lenders party
      thereto


59





10.20
                
                (5)
                
                Security
      Agreement, dated as of November 18, 2005, with Merrill Lynch Capital
      Corporation10.21
                
                (5)
                
                Securities
      Pledge Agreement, dated as of November 18, 2005, with Merrill Lynch
      Capital Corporation10.22
                
                (5)
                
                Guaranty,
      dated as of November 18, 2005, with Merrill Lynch Capital
      Corporation10.23
                
                (9)
      +
                
                Form
      of Non-Qualified Stock Option Agreement for directors with Chicken
      Acquisition Corp.10.24
                
                (5)
      +
                
                Form
      of Non-Qualified Stock Option Agreement for officers with Chicken
      Acquisition Corp.10.25
                
                (5)
      +
                
                Chicken
      Acquisition Corp. 2005 Stock Option Plan10.26
                
                (16)
                
                Confidential
      Settlement and Release Agreement dated June 18, 2008, between El Pollo
      Loco, Inc. and El Pollo Loco, S.A. de C.V.10.27
                
                (16)
                
                Termination
      Agreement dated June 23, 2008, among El Pollo Loco, Inc., Chicken
      Acquisition Corp. and Trimaran Fund II, LLC10.28
                
                
                
                Form
      of Franchise Development Agreement10.29
                
                
                
                Form
      of Franchise Agreement10.30
                
                (1)+
                
                Compensation
      of Independent Directors10.31
                
                (9)
                
                Fiesta
      Brands Development Agreement dated August 10, 2006.10.32
                
                (8)
                
                Amendment
      No. 1 to the Monitoring and Management Services Agreement, dated December
      26, 2007, among Chicken Acquisition Corp., Trimaran Fund Management, LLC,
      and Freeman Spogli & Co. V, L.P.10.33
                
                (8)
                
                Amendment
      No. 1 to the Second Amended and Restated Limited Liability Company
      Operating Agreement of Trimaran Pollo Partners, L.L.C., dated December 26,
      2007, among Trimaran Pollo Partners, LLC, certain members of Trimaran
      Pollo Partners, LLC, FS Equity Partners V, L.P. and  FS
      Affiliates V, L.P.10.34
                
                (8)
                
                Amendment
      No. 2 to the Stockholders Agreement, dated December 26, 2007, between
      Chicken Acquisition Corp. and Trimaran Pollo Partners, LLC. Note: this
      exhibit was incorrectly identified as Amendment No. 1 to the Stockholders
      Agreements in the Form 8-K filed on January 2, 2008. Amendment No. 1 to
      the Stockholders Agreement is filed as Exhibit No. 10.16
      hereto.10.35
                
                *
                
                Distribution
      Agreement dated August 15, 2005 between El Pollo Loco, Inc. and
      Meadowbrook Meat Company, Inc., and First Amendment thereto dated August
      3, 2006*10.36
                
                (17)
                
                Asset
      Purchase Agreement and Termination of Franchise Rights dated September 24,
      2009, between EPL and Fiesta Brands, Inc.10.37
                
                (18)
                
                Credit
      Agreement, dated as of May 22, 2009, among El Pollo Loco, Inc., EPL
      Intermediate, Inc., the Subsidiary Guarantors (as defined therein), the
      Lenders (as defined therein), Jefferies Finance LLC, as lead arranger,
      book manager, documentation agent for the Lenders, administrative agent
      for the Lenders and collateral agent for the Secured Parties (as defined
      therein), Jefferies Finance LLC, as syndication agent and Jefferies
      Finance LLC, as issuing bank for the Lenders10.38
                
                (10)
      +
                
                Independent
      Directors Stock Plan10.39
                
                (10)
                
                Lease
      dated May 18, 2007, between El Pollo Loco, Inc. and C.J. Segerstrom &
      Sons.





10.40
                    
                    (11)
                    
                    Amendment
      No. 1 and Agreement dated March 14, 2007 relating to Credit Agreement
      dated November 18,
2005.


60





10.41
                  
                  (12)
                  
                  Amendment
      No. 2 to Second Amended and Restated Limited Liability Company Operating
      Agreement of Trimaran Pollo Partners, L.L.C., dated January 30, 2008,
      among Trimaran Pollo Partners, LLC, certain members of Trimaran Pollo
      Partners, LLC, FS Equity Partners V, L.P. and  FS Affiliates V,
      L.P.10.42
                  
                  (14)+
                  
                  Form
      of Amendment dated March 19, 2008, to the Officer Employment
      Agreements filed as exhibits 10.1, 10.2, 10.4, 10.5, 10.6, 10.8 and 10.9
      hereto.10.43
                  
                  (14)+
                  
                  Adjustment
      to Calculation of EBITDA Applicable to Executive Bonus Awards effective
      February 6, 2008.10.44
                  
                  (14)+
                  
                  Definition
      of EBITDA applicable to Executive Bonus Awards pursuant to Amendment to
      Employment Agreements (Exhibit 10.42 hereto).10.45
                  
                  (15)*
                  
                  Letter
      Agreement dated February 28, 2009, between El Pollo Loco, Inc. and Simmons
      Prepared Foods, Inc.*Letter
      Agreement dated February 28, 2009, between El Pollo Loco, Inc. and Tyson
      Foods10.46
                  
                  (15)*Letter
      Agreement dated February 28, 2009 between El Pollo Loco, Inc. and Koch
      Foods, Inc. *10.47
                  
                  (15)*Letter
      Agreement dated February 28, 2009 between El Pollo Loco, Inc.
      and  Pilgrim’s Pride10.48
                  
                  (15)*
                  
                  Corporation
      *12.1
                  
                  
                  
                  Computation
      of Ratio of Earnings to Fixed Charges14.1
                  
                  (4)
                  
                  El
      Pollo Loco, Inc. Code of Business Ethics & Conduct21.1
                  
                  (2)
                  
                  Subsidiaries
      of EPL Intermediate, Inc.31.1
                  
                  
                  
                  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 March
      30, 2010.





Footnotes:


(1)
            Incorporated by reference to EPL
      Intermediate, Inc.’s Annual Report on Form 10-K for the year ended
      December 31, 2008 (File No. 333-115644) filed on March 30,
      2009.





(2)
            Incorporated by reference to EPL
      Intermediate, Inc.’s Registration Statement on Form S-4 (File No.
      333-115644) filed on May 19,
2004.





(3)
            Incorporated by reference to El
      Pollo Loco, Inc.’s Registration Statement on Form S-4 (File No.
      333-115486) filed on May 14,
2004.





(4)
            Incorporated by reference to El
      Pollo Loco, Inc.’s Annual Report on Form 10-K for the year ended December
      29, 2004 (File No. 333-115486) filed on March 28,
    2005.





(5)
            Incorporated by reference to EPL
      Intermediate, Inc.’s Form 10-K for the year ended December 27, 2005 (File
      No. 333-115644) filed on April 10,
2006.





(6)
            Incorporated by reference to El
      Pollo Loco, Inc.’s Form 8-K filed on November 4,
    2005.





(7)
            Incorporated by reference to EPL
      Intermediate Inc.’s Registration Statement on Form S-4 (File No.
      333-133318) filed on April 14,
2006.





61





(8)
              Incorporated by reference to EPL
      Intermediate Inc.’s Form 8-K (File No. 333-115644) filed on January 2,
      2008.





(9)
            Incorporated by reference to EPL
      Intermediate Inc.’s Form 10-K (File No. 333-115644) filed March 23,
      2007.





(10)
            Incorporated by reference to EPL
      Intermediate Inc.’s Form 10-Q (File No. 333-115644) filed August 10,
      2007.





(11)
            Incorporated by reference to EPL
      Intermediate Inc.’s Form 10-Q (File No. 333-115644) filed May 14,
      2007.





(12)
            Incorporated
      by reference to EPL Intermediate, Inc.’s Form 8-K (File No. 333-115644)
      filed February 5, 2008.





(13)
            Incorporated
      by reference to EPL Intermediate, Inc.’s Form 10-Q (File No. 333-115644)
      filed November 7, 2008.





(14)
            Incorporated
      by reference to EPL Intermediate, Inc.’s Form 10-K (File No. 333-115644)
      filed March 24, 2008.





(15)
            Incorporated
      by reference to EPL Intermediate, Inc.’s Form 10-Q (File No. 333-115644)
      filed May 12, 2009.





(16)
            Incorporated
      by reference to EPL Intermediate, Inc.’s Form 10-Q (File No. 333-115644)
      filed August 11, 2008.





(17)
            Incorporated
      by reference to EPL Intermediate, Inc.’s Form 10-Q (File No. 333-115644)
      filed November 16, 2009.





(18)
            Incorporated
      by reference to EPL Intermediate, Inc.’s Form 8-K (File No. 333-115644)
      filed May 26, 2009.





(19)
            Incorporated
      by reference to EPL Intermediate, Inc.’s Form 10-Q (File No. 333-115644)
      filed August 14, 2009.





+
            Management contracts and
      compensatory plans and
arrangements.





*
            Certain confidential portions of
      this exhibit have been redacted and filed separately with the Commission
      pursuant to a Confidential Treatment
  Request.


62