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EXCEL - IDEA: XBRL DOCUMENT - Fiesta Restaurant Group, Inc.Financial_Report.xls
EX-32.2 - CHIEF FINANCIAL OFFICER'S CERTIFICATE PURSUANT TO 18 U.S.C. SECTION 1350 - Fiesta Restaurant Group, Inc.frgi-ex322_2014330xq1.htm
EX-32.1 - CHIEF EXECUTIVE OFFICER'S CERTIFICATE PURSUANT TO 18 U.S.C. SECTION 1350 - Fiesta Restaurant Group, Inc.frgi-ex321_2014330xq1.htm
EX-31.1 - CHIEF EXECUTIVE OFFICER'S CERTIFICATE PURSUANT TO SECTION 302 - Fiesta Restaurant Group, Inc.frgi-ex311_2014330xq1.htm
EX-31.2 - CHIEF FINANCIAL OFFICER'S CERTIFICATE PURSUANT TO SECTION 302 - Fiesta Restaurant Group, Inc.frgi-ex312_2014330xq1.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549 
__________________________________________________________
FORM 10-Q
__________________________________________________________
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 30, 2014
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 001-35373 
__________________________________________________________
FIESTA RESTAURANT GROUP, INC.
(Exact name of Registrant as specified in its charter)
__________________________________________________________
Delaware
90-0712224
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
14800 Landmark Boulevard, Suite 500
Addison, Texas
75254
(Address of principal executive office)
(Zip Code)
Registrant’s telephone number, including area code: (972) 702-9300
__________________________________________________________
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  ý  No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on their 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  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): 
Large accelerated filer
ý
Accelerated filer
¨
 
 
 
 
Non-accelerated filer
¨
Smaller reporting company
¨
(Do not check if smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
As of May 2, 2014, Fiesta Restaurant Group, Inc. had 26,786,855 shares of its common stock, $.01 par value, outstanding.



FIESTA RESTAURANT GROUP, INC.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUARTER ENDED MARCH 30, 2014
 
 
 
Page
PART I   FINANCIAL INFORMATION
 
 
 
 
Item 1
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2
 
 
 
Item 3
 
 
 
Item 4
 
 
 
 
 
 
Item 1
 
 
 
Item 1A
 
 
 
Item 2
 
 
 
Item 3
 
 
 
Item 4
 
 
 
Item 5
 
 
 
Item 6

2


PART I—FINANCIAL INFORMATION
ITEM 1—INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FIESTA RESTAURANT GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands of dollars, except share and per share amounts)
(unaudited)
 
March 30,
2014
 
December 29,
2013
ASSETS
 
 
 
Current assets:
 
 
 
Cash
$
2,406

 
$
10,978

Trade receivables
8,434

 
6,011

Inventories
2,497

 
2,564

Prepaid rent
2,542

 
2,500

Income tax receivable
147

 
4,497

Prepaid expenses and other current assets
3,465

 
3,357

Deferred income taxes
2,886

 
3,018

Total current assets
22,377

 
32,925

Property and equipment, net
149,429

 
144,527

Goodwill
123,484

 
123,484

Intangible assets, net
101

 
121

Deferred income taxes
12,259

 
12,046

Deferred financing costs, net
1,459

 
1,530

Other assets
4,165

 
4,152

Total assets
$
313,274

 
$
318,785

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Current liabilities:
 
 
 
Current portion of long-term debt
$
61

 
$
61

Accounts payable
8,763

 
10,802

Accrued interest
165

 
118

Accrued payroll, related taxes and benefits
10,184

 
14,296

Accrued real estate taxes
1,668

 
4,505

Other liabilities
6,042

 
8,305

Total current liabilities
26,883

 
38,087

Long-term debt, net of current portion
65,310

 
72,324

Lease financing obligations
1,658

 
1,657

Deferred income—sale-leaseback of real estate
36,843

 
35,873

Other liabilities
13,784

 
12,538

Total liabilities
144,478

 
160,479

Commitments and contingencies

 

Stockholders' equity:
 
 
 
Common stock, par value $.01; authorized 100,000,000 shares, issued 26,780,381 and 26,710,111 shares, respectively, and outstanding 26,243,588 and 26,082,800 shares, respectively.
262

 
261

Additional paid-in capital
150,535

 
148,765

Retained earnings
17,999

 
9,280

Total stockholders' equity
168,796

 
158,306

Total liabilities and stockholders' equity
$
313,274

 
$
318,785



The accompanying notes are an integral part of these condensed consolidated unaudited financial statements.
3


FIESTA RESTAURANT GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 30, 2014 AND MARCH 31, 2013
(In thousands of dollars, except share and per share amounts)
(Unaudited)
 
Three Months Ended
 
March 30, 2014
 
March 31, 2013
Revenues:
 
 
 
Restaurant sales
$
144,825

 
$
133,090

Franchise royalty revenues and fees
611

 
534

Total revenues
145,436

 
133,624

Costs and expenses:
 
 
 
Cost of sales
45,529

 
42,411

Restaurant wages and related expenses (including stock-based compensation expense of $9 and $1, respectively)
36,506

 
35,116

Restaurant rent expense
7,204

 
6,435

Other restaurant operating expenses
17,885

 
16,164

Advertising expense
5,419

 
4,549

General and administrative (including stock-based compensation expense of $712 and $425, respectively)
12,151

 
12,211

Depreciation and amortization
5,345

 
4,810

Pre-opening costs
683

 
831

Impairment and other lease charges
(15
)
 
95

Other income
(6
)
 
(497
)
Total operating expenses
130,701

 
122,125

Income from operations
14,735

 
11,499

Interest expense
603

 
5,007

Income before income taxes
14,132

 
6,492

Provision for income taxes
5,413

 
1,693

Net income
$
8,719

 
$
4,799

Basic net income per share
$
0.33

 
$
0.20

Diluted net income per share
$
0.33

 
$
0.20

Basic weighted average common shares outstanding (Note 8)
26,201,747

 
22,868,894

Diluted weighted average common shares outstanding (Note 8)
26,202,309

 
22,868,894



The accompanying notes are an integral part of these condensed consolidated unaudited financial statements.
4


FIESTA RESTAURANT GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 30, 2014 and March 31, 2013
(In thousands of dollars, except share amounts) 
(Unaudited)

 
 
Number of
 
 
 
Additional
 
 
 
Total
 
 
Common
 
Common
 
Paid-In
 
Retained
 
Stockholders'
 
 
Stock Shares
 
Stock
 
Capital
 
Earnings
 
Equity
Balance at December 30, 2012
 
22,748,241

 
$
227

 
$
10,254

 
$
23

 
$
10,504

Stock-based compensation
 

 

 
426

 

 
426

Vesting of restricted shares
 
146,392

 
2

 
(2
)
 

 

Net income
 

 

 

 
4,799

 
4,799

Balance at March 31, 2013
 
22,894,633

 
$
229

 
$
10,678

 
$
4,822

 
$
15,729

 
 
 
 
 
 
 
 
 
 
 
Balance at December 29, 2013
 
26,082,800

 
$
261

 
$
148,765

 
$
9,280

 
$
158,306

Stock-based compensation
 

 

 
721

 

 
721

Vesting of restricted shares and related tax benefit
 
160,788

 
1

 
1,049

 

 
1,050

Net income
 

 

 

 
8,719

 
8,719

Balance at March 30, 2014
 
26,243,588

 
$
262

 
$
150,535

 
$
17,999

 
$
168,796



The accompanying notes are an integral part of these condensed consolidated unaudited financial statements.
5


FIESTA RESTAURANT GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 30, 2014 AND MARCH 31, 2013
(In thousands of dollars)
(Unaudited)
 
Three Months Ended
 
March 30, 2014
 
March 31, 2013
Cash flows from operating activities:
 
 
 
Net income
$
8,719

 
$
4,799

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 
 
 
Loss (gain) on disposals of property and equipment
36

 
(421
)
Stock-based compensation
721

 
426

Impairment and other lease charges
(15
)
 
95

Depreciation and amortization
5,345

 
4,810

Amortization of deferred financing costs
77

 
398

Amortization of deferred gains from sale-leaseback transactions
(919
)
 
(863
)
Deferred income taxes
(82
)
 
60

Changes in other operating assets and liabilities
(6,985
)
 
(9,980
)
Net cash provided by (used in) operating activities
6,897

 
(676
)
Cash flows from investing activities:
 
 
 
Capital expenditures:
 
 
 
New restaurant development
(10,869
)
 
(7,834
)
Restaurant remodeling
(1,929
)
 
(918
)
Other restaurant capital expenditures
(1,432
)
 
(1,362
)
Corporate and restaurant information systems
(1,999
)
 
(1,238
)
Total capital expenditures
(16,229
)
 
(11,352
)
Properties purchased for sale-leaseback

 
(1,277
)
Proceeds from sale-leaseback transactions
5,704

 
2,523

Proceeds from sales of other properties
1,027

 
1,734

Net cash used in investing activities
(9,498
)
 
(8,372
)
Cash flows from financing activities:
 
 
 
Excess tax benefit from vesting of restricted shares
1,050

 

Borrowings on revolving credit facility
8,000

 

Repayments on revolving credit facility
(15,000
)
 

Principal payments on capital leases
(15
)
 
(16
)
Other
(6
)
 
(15
)
Net cash used in financing activities
(5,971
)
 
(31
)
Net decrease in cash
(8,572
)
 
(9,079
)
Cash, beginning of period
10,978

 
15,533

Cash, end of period
$
2,406

 
$
6,454

Supplemental disclosures:
 
 
 
Interest paid on long-term debt
$
470

 
$
9,161

Interest paid on lease financing obligations
$
36

 
$
64

Accruals for capital expenditures
$
1,933

 
$
1,107

Income tax payments, net
$
94

 
$
91


The accompanying notes are an integral part of these condensed consolidated unaudited financial statements.
6

FIESTA RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of dollars, except share and per share amounts)



1. Basis of Presentation
Business Description. Fiesta Restaurant Group, Inc. ("Fiesta Restaurant Group" or "Fiesta") owns, operates and franchises two fast-casual restaurant brands through its wholly-owned subsidiaries Pollo Operations, Inc., and its subsidiaries, and Pollo Franchise, Inc., (collectively “Pollo Tropical”) and Taco Cabana, Inc. and its subsidiaries (collectively “Taco Cabana”). Unless the context otherwise requires, Fiesta and its subsidiaries, Pollo Tropical and Taco Cabana, are collectively referred to as the “Company”. At March 30, 2014, the Company owned and operated 106 Pollo Tropical® restaurants, of which 98 were located in Florida, five were located in Georgia, two were located in Tennessee, and one was located in Texas, and franchised a total of 39 Pollo Tropical restaurants, including 18 in Puerto Rico, one in Ecuador, one in Honduras, one in the Bahamas, two in Trinidad & Tobago, three in Venezuela, three in Costa Rica, three in Panama, one in the Dominican Republic, one in India, one in Guatemala and four on college campuses in Florida. At March 30, 2014, the Company also owned and operated 165 Taco Cabana® restaurants, of which 162 were located in Texas and three were located in Oklahoma, and franchised a total of seven Taco Cabana restaurants, including four in New Mexico, and three non-traditional locations (two college campuses and one sports arena) in Texas.
Spin-Off from Carrols Restaurant Group, Inc. On May 7, 2012, Carrols Restaurant Group, Inc. ("Carrols Restaurant Group" or "Carrols") completed the spin-off of Fiesta through the distribution of all of the outstanding shares of Fiesta Restaurant Group's common stock to the stockholders of Carrols Restaurant Group (the "Spin-off"). As a result of the Spin-off, since May 7, 2012 Fiesta Restaurant Group has been an independent public company whose common stock is traded on The NASDAQ Global Select Market under the symbol “FRGI.”
In connection with the Spin-off, Fiesta and Carrols entered into several agreements that govern Carrols' post Spin-off relationship with Fiesta, including a Separation and Distribution Agreement, Employee Matters Agreement, Tax Matters Agreement and Transition Services Agreement ("TSA"). See Note 4—Former Related Party Transactions.
Basis of Consolidation. The unaudited condensed consolidated financial statements presented herein reflect the consolidated financial position, results of operations and cash flows of Fiesta and its wholly-owned subsidiaries.
Fiscal Year. The Company uses a 52-53 week fiscal year ending on the Sunday closest to December 31. The fiscal year ended December 29, 2013 contained 52 weeks. The three months ended March 30, 2014 and March 31, 2013 each contained thirteen weeks.
Basis of Presentation. The accompanying unaudited condensed consolidated financial statements for the three months ended March 30, 2014 and March 31, 2013 have been prepared without an audit pursuant to the rules and regulations of the Securities and Exchange Commission and do not include certain information and footnotes required by GAAP for complete financial statements. In the opinion of management, all normal and recurring adjustments considered necessary for a fair presentation of such financial statements have been included. The results of operations for the three months ended March 30, 2014 and March 31, 2013 are not necessarily indicative of the results to be expected for the full year.
These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 29, 2013 included in the Company's Annual Report on Form 10-K for the fiscal year ended December 29, 2013. The December 29, 2013 balance sheet data is derived from those audited financial statements.
  Fair Value of Financial Instruments. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. In determining fair value, the accounting standards establish a three level hierarchy for inputs used in measuring fair value as follows: Level 1 inputs are quoted prices in active markets for identical assets or liabilities; Level 2 inputs are observable for the asset or liability, either directly or indirectly, including quoted prices in active markets for similar assets or liabilities; and Level 3 inputs are unobservable and reflect our own assumptions. The following methods were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate the fair value:
Current Assets and Liabilities. The carrying values reported on the balance sheet of cash, accounts receivable and accounts payable approximate fair value because of the short maturity of those financial instruments.
Revolving Credit Borrowings. The fair value of outstanding revolving credit borrowings under our new senior credit facility, which is considered Level 2, is based on current LIBOR rates and at March 30, 2014, was approximately $64.0 million.

7

FIESTA RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands of dollars, except share and per share amounts)


Long-Lived Assets. The Company reviews its long-lived assets, principally property and equipment, for impairment at the restaurant level. In addition to considering management’s plans, known regulatory or governmental actions and damage due to acts of God (hurricanes, tornadoes, etc.), the Company considers a triggering event to have occurred related to a specific restaurant if the restaurant’s cash flows for the last twelve months are less than a minimum threshold or if consistent levels of cash flows for the remaining lease period are less than the carrying value of the restaurant’s assets. If an indicator of impairment exists for any of its assets, an estimate of undiscounted future cash flows over the life of the primary asset for each restaurant is compared to that long-lived asset’s carrying value. If the carrying value is greater than the undiscounted cash flow, the Company then determines the fair value of the asset and if an asset is determined to be impaired, the loss is measured by the excess of the carrying amount of the asset over its fair value. For closed restaurant locations, the Company reviews the future minimum lease payments and related ancillary costs from the date of the restaurant closure to the end of the remaining lease term and records a lease charge for the lease liabilities to be incurred, net of any estimated sublease recoveries.
Use of Estimates. The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements. Estimates also affect the reported amounts of expenses during the reporting periods. Significant items subject to such estimates and assumptions include: accrued occupancy costs, insurance liabilities, evaluation for impairment of goodwill and long-lived assets and lease accounting matters. Actual results could differ from those estimates.
2. Long-term Debt
New Senior Credit Facility. In December 2013, the Company terminated its former senior secured revolving credit facility, referred to as the “former senior credit facility”, and entered into a new senior secured revolving credit facility with a syndicate of lenders, which we refer to as the "new senior credit facility". The new senior credit facility provides for aggregate revolving credit borrowings of up to $150 million (including $15 million available for letters of credit) and matures on December 11, 2018. The new senior credit facility also provides for potential incremental increases of up to $50 million to the revolving credit borrowings available under the new senior credit facility. On March 30, 2014, there were $64.0 million in outstanding borrowings under our new senior credit facility.
Borrowings under the new senior credit facility bear interest at a per annum rate, at our option, equal to either (all terms as defined in the new senior credit facility):
1) the Alternate Base Rate plus the applicable margin of 0.50% to 1.50% based on our Adjusted Leverage Ratio (with a margin of 0.75% as of March 30, 2014), or
2) the LIBOR Rate plus the applicable margin of 1.50% to 2.50% based on our Adjusted Leverage Ratio (with a margin of 1.75% at March 30, 2014).
In addition, the new senior credit facility requires the Company to pay (i) a commitment fee based on the applicable Commitment Fee margin of 0.25% to 0.45%, based on our Adjusted Leverage Ratio (with a margin of 0.30% at March 30, 2014) and the unused portion of the facility and (ii) a letter of credit fee based on the applicable LIBOR margin and the dollar amount of outstanding letters of credit.
All obligations under the Company's new senior credit facility are guaranteed by all of Company's material domestic subsidiaries. In general, the Company's obligations under the new senior credit facility and its subsidiaries’ obligations under the guarantees are secured by a first priority lien and security interest on substantially all of its assets and the assets of its material subsidiaries (including a pledge of all of the capital stock and equity interests of its material subsidiaries), other than certain specified assets, including real property owned by the Company or its subsidiaries.
The new senior credit facility requires the Company to comply with customary affirmative, negative and financial covenants. As of March 30, 2014, the Company was in compliance with the covenants under its new senior credit facility.
After reserving $7.5 million for letters of credit issued under the new senior credit facility, $78.5 million was available for borrowing at March 30, 2014.
Former Senior Credit Facility. The former senior credit facility provided for aggregate revolving credit borrowings of up to $25.0 million (including $10.0 million available for letters of credit). The facility also provided for incremental increases of up to $5.0 million, in the aggregate, to the revolving credit borrowings available under the former senior credit facility, and matured on February 5, 2016. The former senior secured credit facility was terminated on December 11, 2013 and replaced with the new senior credit facility discussed above.

8

FIESTA RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands of dollars, except share and per share amounts)


Borrowings under the former senior credit facility bore interest at a per annum rate, at the Company’s option, of either (all terms as defined in the former senior credit facility):
1) the Alternate Base Rate plus the applicable margin of 2.00% to 2.75% based on the Company’s Adjusted Leverage Ratio, or
2) the LIBOR Rate plus the applicable margin of 3.00% to 3.75% based on the Company’s Adjusted Leverage Ratio.
Repurchase of Notes. On November 12, 2013, the Company commenced a tender offer and consent solicitation for all of its outstanding $200.0 million in aggregate principal amount of 8.875% Senior Secured Second Lien Notes due 2016 (the "Notes"). The principal amount of Notes repurchased in the tender offer totaled $122.7 million. On December 11, 2013, the Company irrevocably called for redemption the remaining $77.3 million principal amount of Notes that were not validly tendered and accepted for payment in the tender offer.
The Notes were issued on August 5, 2011 pursuant to an indenture dated as of August 5, 2011 governing such Notes. The Notes matured and were payable on August 15, 2016. Interest was payable semi-annually on February 15 and August 15. The Notes were guaranteed by all of the Company’s subsidiaries and were secured by second-priority liens on substantially all of the Company’s and its subsidiaries’ assets (including a pledge of all of the capital stock and equity interests of its material subsidiaries).
3. Other Liabilities, Long-Term
Other liabilities, long-term, consisted of the following:
 
March 30, 2014
 
December 29, 2013
Accrued occupancy costs
$
10,488

 
$
9,973

Accrued workers’ compensation and general liability claims
660

 
729

Deferred compensation
830

 
593

Other
1,806

 
1,243

 
$
13,784

 
$
12,538

Accrued occupancy costs include obligations pertaining to closed restaurant locations and accruals to expense operating lease rental payments on a straight-line basis over the lease term.
The following table presents the activity in the closed-store reserve, of which $1.1 million is included in long-term accrued occupancy costs above at March 30, 2014 and December 29, 2013, with the remainder in other current liabilities:
 
Three Months Ended March 30, 2014
 
Year Ended December 29, 2013
Balance, beginning of period
$
1,439

 
$
2,432

Provisions for restaurant closures

 

Recoveries, net of additional lease charges
(37
)
 
(197
)
Payments, net
(95
)
 
(937
)
Other adjustments
34

 
141

Balance, end of period
$
1,341

 
$
1,439


4. Former Related Party Transactions
Effective upon the completion of the Spin-off, Fiesta Restaurant Group ceased to be a related party of Carrols.
As of March 30, 2014 and December 29, 2013, Carrols owed $0.2 million and $0.3 million, respectively, to the Company, which is included in receivables in the accompanying condensed consolidated balance sheets.
Relationship Between Fiesta and Carrols After the Spin-Off
For purposes of governing certain of the ongoing relationships between the Company and Carrols at and after the Spin-off, the Company and Carrols have entered into the following agreements:
Tax Matters Agreement. The tax matters agreement dated April 24, 2012, (the "Tax Matters Agreement"), (1) governs the allocation of the tax assets and liabilities between Fiesta and Carrols and Carrols Corporation, a subsidiary of Carrols

9

FIESTA RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands of dollars, except share and per share amounts)


("Carrols Corp."), (2) provides for certain restrictions and indemnities in connection with the tax treatment of the Spin-off and (3) addresses certain other tax related matters, including, without limitation, those relating to (a) the obligations of Carrols, Carrols Corp. and the Company with respect to the preparation or filing of tax returns for all periods, and (b) the control of any income tax audits and any indemnities with respect thereto. The Tax Matters Agreement provides that if the Company takes any actions after Carrols’ distribution of our shares in the Spin-off that result in or cause the distribution to be taxable to Carrols, the Company will be responsible under the Tax Matters Agreement for any resulting taxes imposed on the Company or on Carrols or Carrols Corp. Further, the Tax Matters Agreement provides that the Company will be responsible for 50% of the losses and taxes of Carrols and its affiliates resulting from the Spin-off not attributable to any such action of the Company or an equivalent action by Carrols.
Transition Services Agreement. Under the TSA, Carrols and Carrols Corp. agreed to provide certain support services (including accounting, tax accounting, treasury management, internal audit, financial reporting and analysis, human resources and employee benefits management, information systems, restaurant systems support, legal, property management and insurance and risk management services) to the Company, and the Company agreed to provide certain limited management services (including certain legal services) to Carrols and Carrols Corp. During the three months ended March 31, 2013, the Company recognized expenses of $1.3 million related to the TSA. In October 2013, the Company terminated the TSA with respect to substantially all of the remaining services provided under the TSA with the exception of certain information technology services and other miscellaneous services. The Company terminated the remaining services under the TSA in December 2013.
5. Income Taxes
The Company’s income tax provision was comprised of the following for the three months ended March 30, 2014 and March 31, 2013:
 
Three Months Ended
 
March 30, 2014
 
March 31, 2013
Current
$
5,495

 
$
1,633

Deferred
(82
)
 
60

 
$
5,413

 
$
1,693

The provision for income taxes for the three months ended March 30, 2014 was derived using an estimated effective annual income tax rate for 2014 of 38.3%. There were no discrete tax adjustments in the three months ended March 30, 2014.
The provision for income taxes for the three months ended March 31, 2013 was derived using an estimated effective annual income tax rate for 2013 of 35.8%, which excludes any discrete tax adjustments.
The American Taxpayer Relief Act of 2013 (the "Act") was signed into law on January 2, 2013. The Act included a provision to retroactively restore several expired business tax provisions, including the Work Opportunity Tax Credit, as of January 1, 2012, with a new expiration date of December 31, 2013.  Because a change in tax law is accounted for in the period of enactment, and the Act was enacted after Fiesta's fiscal year-end, the retroactive effect of renewing the Work Opportunity Tax Credit was recorded as a discrete item in the first quarter of 2013. The discrete tax adjustment for the retroactive effect of renewing the Work Opportunity Tax Credit decreased the provision for income taxes by $0.6 million in the three months ended March 31, 2013.
6. Stock-Based Compensation
Prior to the Spin-off, certain of the Company's employees participated in the Carrols Restaurant Group, Inc. 2006 Stock Incentive Plan, as amended (the "Carrols Plan"). In conjunction with the Spin-off, the Company established the Fiesta Restaurant Group, Inc. 2012 Stock Incentive Plan (the "Fiesta Plan") in order to be able to compensate its employees and directors by issuing stock options, stock appreciation rights, or stock awards to them under this plan. For the three months ended March 30, 2014 and March 31, 2013, the condensed consolidated statements of operations include expenses related to the Company's employees' and directors' participation in both the Carrols Plan and the Fiesta Plan.
Effective as of the completion of the Spin-off, all holders of Carrols non-vested restricted stock (awarded under the Carrols Plan) on April 26, 2012, the record date of the Spin-off, received one share of Fiesta Restaurant Group non-vested restricted stock for every one share of Carrols non-vested restricted stock held, with terms and conditions substantially similar to the terms and conditions applicable to the Carrols non-vested restricted stock. Future stock compensation expense on all non-vested restricted Carrols and Fiesta stock awards held by the Company's employees will be recorded by the Company.

10

FIESTA RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands of dollars, except share and per share amounts)


During the three months ended March 30, 2014, the Company granted 71,891 non-vested restricted shares under the Fiesta Plan to certain employees. These shares vest and become non-forfeitable over a four year vesting period. The weighted average fair value at grant date for the non-vested shares issued to employees during the three months ended March 30, 2014 was $45.04.
Also during the three months ended March 30, 2014, the Company granted 24,252 restricted stock units under the Fiesta Plan to certain employees. Certain of the restricted stock units vest and become non-forfeitable over a four year vesting period and certain of the restricted units vest and become non-forfeitable at the end of a four year vesting period. The weighted average fair value at grant date for the restricted stock units issued to employees during the three months ended March 30, 2014 was $45.04.
During the three months ended March 31, 2013, the Company granted in the aggregate 152,703 non-vested restricted shares under the Fiesta Plan to certain employees. These shares vest and become non-forfeitable over a four year vesting period. The weighted average fair value at the grant date for restricted non-vested shares issued to employees during the three months ended March 31, 2013 was $20.54.
Stock-based compensation expense for the three months ended March 30, 2014 and March 31, 2013 was $0.7 million and $0.4 million, respectively. As of March 30, 2014, the total unrecognized stock-based compensation expense relating to non-vested restricted shares and non-vested restricted stock units was approximately $8.9 million. At March 30, 2014, the remaining weighted average vesting period for non-vested restricted shares and non-vested restricted stock units was 2.4 years.
 
 Non-vested Shares
 A summary of all non-vested restricted share activity for the three months ended March 30, 2014 was as follows:
 
 
 
Weighted
 
 
 
Average
 
 
 
Grant Date
 
Shares
 
Price
Non-vested at December 29, 2013
627,311

 
$
14.81

Granted
71,891

 
45.04

Vested
(160,788
)
 
13.20

Forfeited
(1,621
)
 
17.63

Non-vested at March 30, 2014
536,793

 
$
19.33


The fair value of the non-vested restricted shares is based on the closing price on the date of grant.
7. Business Segment Information
The Company is engaged in the fast-casual restaurant industry, with two restaurant concepts (each of which is an operating segment): Pollo Tropical and Taco Cabana. Pollo Tropical is a fast-casual restaurant brand offering a wide variety of freshly prepared Caribbean inspired food, while our Taco Cabana restaurants offer a broad selection of hand-made, freshly prepared and authentic Mexican food.
The accounting policies of each segment are the same as those described in the summary of significant accounting policies discussed in Note 1. The Company reports more than one measure of segment profit or loss to the chief operating decision maker for the purposes of allocating resources to the segments and assessing their performance. The primary measures of segment profit or loss used to assess performance and allocate resources are income before taxes and Adjusted EBITDA, which is defined as earnings attributable to the applicable operating segment before interest, income taxes, depreciation and amortization, impairment and other lease charges, stock-based compensation expense and other income and expense. Although the chief operating decision maker uses Adjusted EBITDA as a measure of segment profitability, in accordance with Accounting Standards Codification 280, Segment Reporting, the following table includes segment income before taxes, which is the measure of segment profit or loss determined in accordance with the measurement principles that are most consistent with the principles used in measuring the corresponding amounts in the consolidated financial statements.

11

FIESTA RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands of dollars, except share and per share amounts)


The “Other” column includes corporate related items not allocated to reportable segments and consists primarily of corporate owned property and equipment, miscellaneous prepaid costs, capitalized costs associated with the issuance of indebtedness and corporate cash accounts.
 
Three Months Ended
 
Pollo Tropical
 
Taco Cabana
 
Other
 
Consolidated
March 30, 2014:
 
 
 
 
 
 
 
 
Restaurant sales
 
$
71,356

 
$
73,469

 
$

 
$
144,825

Franchise revenue
 
488

 
123

 

 
611

Cost of sales
 
23,229

 
22,300

 

 
45,529

Restaurant wages and related expenses (1)
 
15,265

 
21,241

 

 
36,506

Restaurant rent expense
 
2,917

 
4,287

 

 
7,204

Other restaurant operating expenses
 
8,377

 
9,508

 

 
17,885

Advertising expense
 
1,962

 
3,457

 

 
5,419

General and administrative expense (2)
 
6,240

 
5,911

 

 
12,151

Depreciation and amortization
 
2,577

 
2,768

 

 
5,345

Pre-opening costs
 
533

 
150

 

 
683

Impairment and other lease charges
 
(39
)
 
24

 

 
(15
)
Interest expense
 
287

 
316

 

 
603

Income before taxes
 
10,496

 
3,636

 

 
14,132

Capital expenditures
 
9,821

 
4,649

 
1,759

 
16,229

March 31, 2013:
 
 
 
 
 
 
 
 
Restaurant sales
 
$
61,869

 
$
71,221

 
$

 
$
133,090

Franchise revenue
 
413

 
121

 

 
534

Cost of sales
 
20,493

 
21,918

 

 
42,411

Restaurant wages and related expenses (1)
 
14,317

 
20,799

 

 
35,116

Restaurant rent expense
 
2,357

 
4,078

 

 
6,435

Other restaurant operating expenses
 
7,203

 
8,961

 

 
16,164

Advertising expense
 
1,574

 
2,975

 

 
4,549

General and administrative expense (2)
 
6,234

 
5,977

 

 
12,211

Depreciation and amortization
 
2,099

 
2,711

 

 
4,810

Pre-opening costs
 
493

 
338

 

 
831

Impairment and other lease charges
 
39

 
56

 

 
95

Interest expense
 
2,252

 
2,755

 

 
5,007

Income before taxes
 
5,718

 
774

 

 
6,492

Capital expenditures
 
5,347

 
4,948

 
1,057

 
11,352

Identifiable Assets:
 
 
 
 
 
 
 
 
March 30, 2014:
 
$
146,942

 
$
163,194

 
$
3,138

 
$
313,274

December 29, 2013
 
140,797

 
169,367

 
8,621

 
318,785


(1) Includes stock-based compensation expense of $9 for the three months ended March 30, 2014, and $1 for the three months ended March 31, 2013.
(2) Includes stock-based compensation expense of $712 for the three months ended March 30, 2014, and $425 for the three months ended March 31, 2013.


12

FIESTA RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands of dollars, except share and per share amounts)


8. Net Income per Share
 We compute basic net income per share by dividing net income applicable to common shares by the weighted average number of common shares outstanding during each period. Our non-vested restricted shares contain a non-forfeitable right to receive dividends on a one-to-one per share ratio to common shares and are thus considered participating securities. The impact of the participating securities is included in the computation of basic net income per share pursuant to the two-class method. The two-class method of computing earnings per share is an earnings allocation formula that determines earnings attributable to common shares and participating securities according to dividends declared (whether paid or unpaid) and participation rights in undistributed earnings. Net income per common share was computed by dividing undistributed earnings allocated to common shareholders by the weighted average number of common shares outstanding for the period. In applying the two-class method, undistributed earnings are allocated to both common shares and non-vested restricted shares based on the weighted average shares outstanding during the period.
Diluted earnings per share reflects the potential dilution that could occur if our restricted stock units were converted into common shares. We compute diluted earnings per share by adjusting the basic weighted average number of common shares by the dilutive effect of the restricted stock units, determined using the treasury stock method.
The computation of basic and diluted net income per share for the three months ended March 30, 2014 and March 31, 2013 is as follows:
 
  
Three Months Ended
 
  
March 30, 2014
 
March 31, 2013
Basic and diluted net income per share:
  
 
 
 
Net income
  
$
8,719

 
$
4,799

Less: income allocated to participating securities
  
(175
)
 
(157
)
Net income available to common stockholders
  
$
8,544

 
$
4,642

Weighted average common shares, basic
 
26,201,747

 
22,868,894

Restricted stock units
 
562

 

Weighted average common shares, diluted
  
26,202,309

 
22,868,894

Basic net income per common share
  
$
0.33

 
$
0.20

Diluted net income per common share
 
$
0.33

 
$
0.20

 
9. Commitments and Contingencies
The Company is a party to various litigation matters incidental to the conduct of business. The Company does not believe that the outcome of any of these matters will have a material effect on its consolidated financial statements.
10. Recent Accounting Pronouncements
In April 2014, the Financial Accounting Standards Board issued ASU 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, which raises the threshold for a disposal to qualify as a discontinued operation and requires new disclosures of both discontinued operations and certain other disposals that do not meet the definition of a discontinued operation. For the Company, the guidance is effective for the interim and annual periods beginning December 29, 2014. The ASU is applied prospectively; however, early adoption is permitted for disposals (or classifications as held for sale) that have not been reported in financial statements previously issued or available for issue. The Company intends to early adopt this standard.


13


ITEM 2-MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Throughout this Management's Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”), we refer to Fiesta Restaurant Group, Inc. as “Fiesta Restaurant Group” or "Fiesta" and, together with its consolidated subsidiaries, as “we,” “our” and “us” unless otherwise indicated or the context otherwise requires. Any reference to “Carrols Restaurant Group” refers to Carrols Restaurant Group, Inc., a Delaware corporation and our former indirect parent company, and its consolidated subsidiaries (other than Fiesta Restaurant Group and its subsidiaries after the distribution date, as defined below), unless otherwise indicated or the context otherwise requires. Any reference to “Carrols” refers to Carrols Corporation, a Delaware corporation and our former direct parent company prior to the Spin-off, as defined below, and its consolidated subsidiaries (other than Fiesta Restaurant Group and its subsidiaries after the distribution date), unless otherwise indicated or the context otherwise requires.
The following MD&A is written to help the reader understand our company. The MD&A is provided as a supplement to, and should be read in conjunction with our Unaudited Condensed Consolidated Financial Statements and the accompanying financial statement notes appearing elsewhere in this report.
On May 7, 2012 (the "distribution date"), Carrols Restaurant Group completed the spin-off of Fiesta through the distribution of all of the outstanding shares of Fiesta Restaurant Group's common stock to the stockholders of Carrols (the "Spin-off"). As a result of the Spin-off, since the distribution date we have been an independent public company and our common stock is traded on The NASDAQ Global Select Market under the symbol “FRGI.”
We use a 52-53 week fiscal year ending on the Sunday closest to December 31. The fiscal year ended December 29, 2013 contained 52 weeks. The three months ended March 30, 2014 and March 31, 2013 each contained thirteen weeks.
Company Overview
We own, operate and franchise two fast-casual restaurant brands, Pollo Tropical® and Taco Cabana®, which have over 25 years and 35 years, respectively, of operating history and loyal customer bases. Our Pollo Tropical restaurants offer a wide variety of freshly prepared Caribbean inspired food, while our Taco Cabana restaurants offer a broad selection of hand-made, freshly prepared and authentic Mexican food. We believe that both brands are differentiated from other restaurant concepts and offer a unique dining experience. We are positioned within the value-oriented fast-casual restaurant segment, which combines the convenience and value of quick-service restaurants with the variety, food quality, décor and atmosphere more typical of casual dining restaurants. Our open display kitchen format allows guests to view and experience our food being freshly-prepared and cooked to order. Additionally, nearly all of our restaurants offer the convenience of drive-thru service. As of March 30, 2014, our company-owned restaurants included 106 Pollo Tropical restaurants and 165 Taco Cabana restaurants.
We franchise our Pollo Tropical restaurants primarily internationally and as of March 30, 2014, we had 39 franchised Pollo Tropical restaurants located in Puerto Rico, Ecuador, Honduras, Trinidad & Tobago, the Bahamas, Venezuela, Costa Rica, Panama, the Dominican Republic, India, Guatemala and on college campuses in Florida. We have agreements for the continued development of franchised Pollo Tropical restaurants in the existing markets of Venezuela, North India, Trinidad & Tobago, Honduras, Costa Rica, Panama and Guatemala, and we have agreements to develop new restaurants in the additional markets of Aruba, Curacao and Bonaire and commitments for additional non-traditional locations in Florida. As of March 30, 2014, we had four Taco Cabana franchised restaurants located in New Mexico and three non-traditional Taco Cabana licensed locations in Texas.
Recent and Future Events Affecting our Results of Operations
On November 12, 2013, we commenced a tender offer and consent solicitation for all of our outstanding $200.0 million aggregate principal amount of 8.875% Senior Secured Second Lien Notes due 2016 (the "Notes"). The principal amount of Notes repurchased in the tender offer totaled $122.7 million.
On November 20, 2013, we sold 3,078,336 shares of Fiesta's common stock in an underwritten public offering at a price of $46.00 per share (excluding underwriting discounts and commissions) pursuant to a Registration Statement on Form S-3 (Registration No. 333-192254). The aggregate net proceeds to us from the offering were approximately $135.3 million, reflecting gross proceeds of $141.6 million, net of underwriting fees of approximately $5.7 million and other offering costs of approximately $0.7 million.
On December 11, 2013, we irrevocably called for redemption the remaining $77.3 million principal amount of Notes that were not validly tendered and accepted for payment in the tender offer.
Also on December 11, 2013, we terminated our former senior secured revolving credit facility, which we refer to as our “former senior credit facility”, and entered into a new senior secured revolving credit facility, which we refer to as our "new senior credit facility". The new senior credit facility provides for aggregate revolving credit borrowings of up to $150 million

14


(including $15 million available for letters of credit) and matures on December 11, 2018. The new senior credit facility also provides for potential incremental increases of up to $50 million to the revolving credit borrowings available under the new senior credit facility. On March 30, 2014, there was $64.0 million in outstanding borrowings under our new senior credit facility.
Interest expense decreased $4.3 million in the three months ended March 30, 2014 as a result of the refinancing, repurchase and redemption of our Notes.
Executive Summary-Consolidated Operating Performance for the Three Months Ended March 30, 2014
Our first quarter 2014 results and highlights include the following:

Net income increased $3.9 million to $8.7 million in the first quarter of 2014, or $0.33 per diluted share, compared to net income of $4.8 million, or $0.20 per diluted share in the first quarter of 2013, primarily due to the net impact of the growth in revenues discussed below and the decrease in interest expense as a result of the refinancing transactions, which included the repurchase and redemption of our Notes and entering into our new senior credit facility.

Total revenues increased 8.8% in the first quarter of 2014 to $145.4 million compared to $133.6 million in the first quarter of 2013, driven primarily by an increase in the number of our company-owned restaurants and an increase in comparable restaurant sales of 6.3% for our Pollo Tropical restaurants and 0.8% for our Taco Cabana restaurants. The growth in comparable restaurant sales resulted primarily from an increase in average check of 1.7% at Pollo Tropical and 2.8% at Taco Cabana and an increase in transactions at Pollo Tropical of 4.6%, partially offset by a decrease in transactions at Taco Cabana of 2.0%.

During the first quarter of 2014, we opened four new company-owned Pollo Tropical restaurants, including the first Pollo Tropical restaurant in Texas. We expect that approximately half of our Pollo Tropical new restaurant openings in 2014 will be in Texas. During the first quarter of 2013, we opened two new Pollo Tropical restaurants and two new Taco Cabana restaurants.

Adjusted EBITDA increased $4.4 million in the first quarter of 2014 to $20.8 million compared to $16.3 million in the first quarter of 2013, primarily due to the net impact of the increase in revenues. Adjusted EBITDA is a non-GAAP financial measure of performance. For a discussion of our use of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to net income, see "Management's Use of Non-GAAP Financial Measures".


15


Results of Operations
Three Months Ended March 30, 2014 Compared to Three Months Ended March 31, 2013
The following table sets forth, for the three months ended March 30, 2014 and March 31, 2013, selected consolidated operating results as a percentage of consolidated restaurant sales:
 
 
Three Months Ended
 
March 30, 2014
 
March 31, 2013
 
March 30, 2014
 
March 31, 2013
 
March 30, 2014
 
March 31, 2013
 
Pollo Tropical
 
Taco Cabana
 
Consolidated
Restaurant sales:
 
 
 
 
 
 
 
 
 
 
 
Pollo Tropical
 
 
 
 
 
 
 
 
49.3
%
 
46.5
%
Taco Cabana
 
 
 
 
 
 
 
 
50.7
%
 
53.5
%
Consolidated restaurant sales
 
 
 
 
 
 
 
 
100.0
%
 
100.0
%
Costs and expenses:
 
 
 
 
 
 
 
 
 
 
 
Cost of sales
32.6
%
 
33.1
%
 
30.4
%
 
30.8
%
 
31.4
%
 
31.9
%
Restaurant wages and related expenses
21.4
%
 
23.1
%
 
28.9
%
 
29.2
%
 
25.2
%
 
26.4
%
Restaurant rent expense
4.1
%
 
3.8
%
 
5.8
%
 
5.7
%
 
5.0
%
 
4.8
%
Other restaurant operating expenses
11.7
%
 
11.6
%
 
12.9
%
 
12.6
%
 
12.3
%
 
12.1
%
Advertising expense
2.7
%
 
2.5
%
 
4.7
%
 
4.2
%
 
3.7
%
 
3.4
%
Pre-opening costs
0.7
%
 
0.8
%
 
0.2
%
 
0.5
%
 
0.5
%
 
0.6
%
The following table summarizes the changes in the number and mix of Pollo Tropical and Taco Cabana company-owned and franchised restaurants:
 
Pollo Tropical
 
Taco Cabana
 
Owned
 
Franchised
 
Total
 
Owned
 
Franchised
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
December 29, 2013
102

 
39

 
141

 
165

 
7

 
172

   New
4

 
1

 
5

 

 

 

   Closed

 
(1
)
 
(1
)
 

 

 

March 30, 2014
106

 
39

 
145

 
165

 
7

 
172

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 30, 2012
91

 
35

 
126

 
160

 
8

 
168

   New
2

 
1

 
3

 
2

 

 
2

   Closed

 

 

 

 

 

March 31, 2013
93

 
36

 
129

 
162

 
8

 
170


16


Consolidated Revenues. Revenues include restaurant sales, which consist of food and beverage sales, net of discounts, at our company-owned restaurants, and franchise royalty revenues and fees, which represent ongoing royalty payments that are determined based on a percentage of franchisee sales, franchise fees associated with new restaurant openings, and development fees associated with the opening of new franchised restaurants in a given market. Restaurant sales are influenced by new restaurant openings and closures of restaurants, and changes in comparable restaurant sales.
Total revenues increased 8.8% to $145.4 million in the first quarter of 2014 from $133.6 million in the first quarter of 2013. Restaurant sales also increased 8.8% to $144.8 million in the first quarter of 2014 from $133.1 million in the first quarter of 2013. The following table presents the primary drivers of the increase in restaurant sales for both Pollo Tropical and Taco Cabana for the first quarter of 2014 compared to the first quarter of 2013 (in millions):
Pollo Tropical:
 
Increase in comparable restaurant sales
$
3.8

Impact of new stores, net of closed stores, and other
5.7

   Total increase
$
9.5

 
 
Taco Cabana:
 
Increase in comparable restaurant sales
$
0.5

Impact of new stores, net of closed stores, and other
1.7

   Total increase
$
2.2

Comparable restaurant sales for Pollo Tropical increased 6.3% in the first quarter of 2014. Comparable restaurant sales for Taco Cabana in the first quarter of 2014 increased 0.8%. Restaurants are included in comparable restaurant sales after they have been open for 18 months. Increases in comparable restaurant sales result from an increase in guest traffic and an increase in average check. The increase in average check is primarily driven by menu price increases. For Pollo Tropical, menu price increases drove an increase in restaurant sales of 1.6% in the first quarter of 2014 as compared to the first quarter of 2013. For Taco Cabana, menu price increases drove an increase in restaurant sales of 1.3% in the first quarter of 2014 as compared to the first quarter of 2013, while the remaining increase in average check is primarily driven by a positive change in sales mix due to the implementation of new menu boards.
Franchise revenues increased slightly to $0.6 million in the first quarter of 2014 from $0.5 million in the first quarter of 2013.
Operating costs and expenses. Operating costs and expenses include cost of sales, restaurant wages and related expenses, other restaurant expenses and advertising expenses. Cost of sales consists of food, paper and beverage costs including packaging costs, less purchase discounts. Cost of sales is generally influenced by changes in commodity costs, the sales mix of items sold and the effectiveness of our restaurant-level controls to manage food and paper costs. Key commodities, including chicken and beef, are generally purchased under contracts for future periods of up to one year.
Restaurant wages and related expenses include all restaurant management and hourly productive labor costs, employer payroll taxes, restaurant-level bonuses and related benefits. Payroll and related taxes and benefits are subject to inflation, including minimum wage increases and increased costs for health insurance, workers' compensation insurance and state unemployment insurance.
Other restaurant operating expenses include all other restaurant-level operating costs, the major components of which are utilities, repairs and maintenance, real estate taxes and credit card fees.
Advertising expense includes all promotional expenses including television, radio, billboards and other sponsorships and promotional activities.
Pre-opening costs include costs incurred prior to opening a restaurant, including restaurant employee wages and related expenses, travel expenditures, recruiting, training, promotional costs associated with the restaurant opening and rent, including any non-cash rent expense recognized during the construction period. Pre-opening costs are generally incurred beginning four to six months prior to a restaurant opening.

17


The following tables present the primary drivers of the changes in the components of restaurant operating margins for Pollo Tropical and Taco Cabana for the first quarter of 2014 compared to the first quarter of 2013. All percentages are stated as a percentage of applicable segment restaurant sales.
Pollo Tropical:
 
Cost of sales:
 
   Higher commodity costs
0.1
 %
   Menu price increases
(0.5
)%
Discounts and promotions
(0.2
)%
Other
0.1
 %
      Net decrease in cost of sales as a percentage of restaurant sales
(0.5
)%
 
 
Restaurant wages and related expenses:
 
   Impact of higher sales volumes on fixed labor costs
(0.2
)%
   Lower workers' compensation claim costs
(1.3
)%
   Other
(0.2
)%
      Net decrease in restaurant wages and related costs as a percentage of restaurant sales
(1.7
)%
 
 
Other operating expenses:
 
   Higher repairs and maintenance costs
0.1
 %
      Net increase in other restaurant operating expenses as a percentage of restaurant sales
0.1
 %
 
 
Advertising expense:
 
   Increase in advertising and timing of promotions
0.2
 %
      Net increase in advertising expense as a percentage of restaurant sales
0.2
 %
 
 
Pre-opening costs:
 
   Increased sales and timing of restaurant openings
(0.1
)%
      Net decrease in pre-opening costs as a percentage of restaurant sales
(0.1
)%

18


Taco Cabana:
 
Cost of sales:
 
Higher commodity costs
0.9
 %
   Menu price increases
(0.9
)%
   Higher rebates and discounts
(0.2
)%
   Other
(0.2
)%
      Net decrease in cost of sales as a percentage of restaurant sales
(0.4
)%
 
 
Restaurant wages and related expenses:
 
   Impact of higher sales volumes on fixed labor costs
(0.3
)%
      Net decrease in restaurant wages and related costs as a percentage of restaurant sales
(0.3
)%
 
 
Other operating expenses:
 
   Higher insurance costs
0.1
 %
   Higher credit card usage
0.1
 %
   Other
0.1
 %
      Net increase in other restaurant operating expenses as a percentage of restaurant sales
0.3
 %
 
 
Advertising expense:
 
   Increase in advertising and timing of promotions
0.5
 %
      Net increase in advertising expense as a percentage of restaurant sales
0.5
 %
 
 
Pre-opening costs:
 
   Decrease in number of restaurants opened
(0.3
)%
      Net decrease in pre-opening costs as a percentage of restaurant sales
(0.3
)%
Consolidated Restaurant Rent Expense. Restaurant rent expense includes base rent and contingent rent on our leases characterized as operating leases, reduced by amortization of gains on sale-leaseback transactions. Restaurant rent expense, as a percentage of total restaurant sales, increased to 5.0% in the first quarter of 2014 from 4.8% the first quarter of 2013 primarily as a result of sale-leaseback transactions and new restaurants, which generally have higher rent.
Consolidated General and Administrative Expenses. General and administrative expenses are comprised primarily of (1) salaries and expenses associated with the development and support of our Company and brands and the management oversight of the operation of our restaurants; (2) legal, auditing and other professional fees and stock-based compensation expense; and (3) in 2013, costs incurred under the TSA for administrative support services.
General and administrative expenses were $12.2 million in the first quarter of 2014 and the first quarter of 2013. As a percentage of total revenues, general and administrative expenses decreased to 8.4% in the first quarter of 2014 compared to 9.1% in the first quarter of 2013. The decrease was due primarily to the impact of higher sales on fixed costs.
Adjusted EBITDA. Adjusted EBITDA, which is one of the measures of segment profit or loss used by our chief operating decision maker for purposes of allocating resources to our segments and assessing their performance, is defined as earnings attributable to the applicable segment before interest, income taxes, depreciation and amortization, impairment and other lease charges, stock-based compensation expense and other income and expense. Adjusted EBITDA may not be necessarily comparable to other similarly titled captions of other companies due to differences in methods of calculation. Adjusted EBITDA for each of our segments includes an allocation of general and administrative expenses associated with administrative support for executive management, information systems and certain accounting, legal and other administrative functions. Adjusted EBITDA is a non-GAAP financial measure of performance. For a discussion of our use of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to net income, see "Management's Use of Non-GAAP Financial Measures".
Adjusted EBITDA for Pollo Tropical increased to $13.7 million in the first quarter of 2014 from $9.8 million in the first quarter of 2013 due primarily to the net impact of the increase in revenues. Adjusted EBITDA for Taco Cabana increased to $7.1 million in the first quarter of 2014 from $6.5 million in the first quarter of 2013 also primarily due to the net impact of the increase in revenues.

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Depreciation and Amortization. Depreciation and amortization expense increased to $5.3 million in the first quarter of 2014 from $4.8 million in the first quarter of 2013 due primarily to increased depreciation relating to new company-owned restaurant openings, partially offset by the impact of sale-leaseback transactions.
Interest Expense. Interest expense decreased $4.4 million to $0.6 million in the first quarter of 2014 from $5.0 million in the first quarter 2013 primarily due to the refinancing transactions, which included the repurchase and redemption of our Notes and entering into our new senior credit facility with revolving borrowings at lower interest rates than the Notes, as described above under "Recent and Future Events Affecting our Results of Operations".
Provision for Income Taxes. The provision for income taxes for the first quarter of 2014 was derived using an estimated effective annual income tax rate for 2014 of 38.3%, while the provision for income taxes for the first quarter of 2013 was derived using an estimated effective annual income tax rate for 2013 of 35.8%, excluding discrete items. The estimated effective annual income tax rate for 2014 is higher than the effective annual income tax rate estimated in the first quarter of 2013, primarily due to the expiration of the Work Opportunity Tax Credit on December 31, 2013.
Discrete tax adjustments, which include the retroactive effect of renewing the 2012 Work Opportunity Tax Credit in 2013, decreased the provision for income taxes by $0.6 million in the first quarter of 2013. There were no discrete tax adjustments in the first quarter of 2014.
Net Income. As a result of the foregoing, we had net income of $8.7 million in the first quarter of 2014 compared to net income of $4.8 million in the first quarter of 2013.

Liquidity and Capital Resources
We do not have significant receivables or inventory and receive trade credit based upon negotiated terms in purchasing food products and other supplies. We are able to operate with a substantial working capital deficit because:
restaurant operations are primarily conducted on a cash basis;
rapid turnover results in a limited investment in inventories; and
cash from sales is usually received before related liabilities for food, supplies and payroll become due.
Capital expenditures and payments related to our lease obligations represent significant liquidity requirements for us. We believe cash generated from our operations, availability of borrowings under our new senior credit facility and proceeds from any sale-leaseback transactions which we may choose to do will provide sufficient cash availability to cover our anticipated working capital needs, capital expenditures and debt service requirements for the next twelve months.
Operating Activities. Net cash provided by operating activities for the first three months of 2014 was $6.9 million. Net cash used for operating activities for the first three months of 2013 was $0.7 million. The increase in net cash provided by operating activities in the first quarter of 2014 was driven by the increase in net income and the change in operating assets and liabilities primarily as a result of a reduction in interest expense payments as a result of the refinancing transactions, which included the repurchase and redemption of our Notes and entering into our new senior credit facility with revolving borrowings at lower interest rates than the Notes, as described above under "Recent and Future Events Affecting our Results of Operations", partially offset by the timing of payments of worker's compensation and general liability claims and other expenses.
Investing Activities. Net cash used for investing activities in the first three months of 2014 and 2013 was $9.5 million and $8.4 million, respectively. Capital expenditures are the largest component of our investing activities and include: (1) new restaurant development, which may include the purchase of real estate; (2) restaurant remodeling, which includes the renovation or rebuilding of the interior and exterior of our existing restaurants; (3) other restaurant capital expenditures, which include capital maintenance expenditures for the ongoing reinvestment and enhancement of our restaurants; and (4) corporate and restaurant information systems.
    

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The following table sets forth our capital expenditures for the periods presented (in thousands):
 
 
Pollo
Tropical
 
Taco
Cabana
 
Other
 
Consolidated
Three Months Ended March 30, 2014
 
 
 
 
 
 
 
New restaurant development
$
9,040

 
$
1,829

 
$

 
$
10,869

Restaurant remodeling

 
1,929

 

 
1,929

Other restaurant capital expenditures (1)
615

 
817

 

 
1,432

Corporate and restaurant information systems
166

 
74

 
1,759

 
1,999

Total capital expenditures
$
9,821

 
$
4,649

 
$
1,759

 
$
16,229

Number of new restaurant openings
4

 

 
 
 
4

Three Months Ended March 31, 2013:
 
 
 
 
 
 
 
New restaurant development
$
4,408

 
$
3,426

 
$

 
$
7,834

Restaurant remodeling
344

 
574

 

 
918

Other restaurant capital expenditures (1)
527

 
835

 

 
1,362

Corporate and restaurant information systems
68

 
113

 
1,057

 
1,238

Total capital expenditures
$
5,347

 
$
4,948

 
$
1,057

 
$
11,352

Number of new restaurant openings
2

 
2

 
 
 
4

 _____________
1)
Excludes restaurant repair and maintenance expenses included in other restaurant operating expenses in our consolidated financial statements. For the three months ended March 30, 2014 and March 31, 2013, total restaurant repair and maintenance expenses were approximately $3.1 million and $2.8 million, respectively.
In the first three months of 2014, investing activities also included two sale-leaseback transactions related to our restaurant properties, the net proceeds from which were $5.7 million, as well as the sale of an excess Taco Cabana property, the net proceeds from which were $1.0 million. In the first three months of 2013, investing activities included a sale-leaseback transaction related to our restaurant properties, the net proceeds from which were $2.5 million, and the sale of an excess property, the net proceeds from which were $1.7 million. In the first three months of 2013 we purchased for $1.3 million one of our existing Taco Cabana restaurant properties to be sold in a future sale-leaseback transaction.
Financing Activities. Net cash used by financing activities in the first three months of 2014 was $6.0 million and included net repayments of revolving credit borrowings under our new credit facility of $7.0 million and the excess tax benefit from vesting of restricted shares of $1.1 million.
New Senior Credit Facility. In December 2013, we terminated our former senior credit facility and entered into a new senior credit facility. The new senior credit facility provides for aggregate revolving credit borrowings of up to $150 million (including $15 million available for letters of credit) and matures on December 11, 2018. The new senior credit facility also provides for potential incremental increases of up to $50 million to the revolving credit borrowings available under the new senior credit facility. On March 30, 2014, there were $64.0 million in outstanding revolving credit borrowings under our new senior credit facility.
Borrowings under the new senior credit facility bear interest at a per annum rate, at our option, equal to either (all terms as defined in the new senior credit facility):
1) the Alternate Base Rate plus the applicable margin of 0.5% to 1.5% based on our Adjusted Leverage Ratio (with a margin of 0.75% as of March 30, 2014), or
2) the LIBOR Rate plus the applicable margin of 1.5% to 2.5% based on our Adjusted Leverage Ratio (with a margin of 1.75% at March 30, 2014).
In addition, the new senior credit facility requires us to pay (i) a commitment fee based on the applicable Commitment Fee margin of 0.25% to 0.45%, based on our Adjusted Leverage Ratio, (with a margin of 0.3% at March 30, 2014) and the unused portion of the facility and (ii) a letter of credit fee based on the applicable LIBOR margin and the dollar amount of outstanding letters of credit.
All obligations under the new senior credit facility are guaranteed by all of our material domestic subsidiaries. In general, our obligations under our new senior credit facility and our subsidiaries’ obligations under the guarantees are secured by a first priority lien and security interest on substantially all of our assets and the assets of our material subsidiaries (including a pledge

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of all of the capital stock and equity interests of our material subsidiaries), other than certain specified assets, including real property owned by us or our subsidiaries.
The outstanding borrowings under the new senior credit facility are prepayable without penalty (other than customary breakage costs). The new senior credit facility requires us to comply with customary affirmative, negative and financial covenants, including, without limitation, those limiting our and our subsidiaries’ ability to (i) incur indebtedness, (ii) incur liens, (iii) loan, advance, or make acquisitions and other investments or other commitments to construct, acquire or develop new restaurants (subject to certain exceptions), (iv) pay dividends, (v) redeem and repurchase equity interests, (vi) conduct asset and restaurant sales and other dispositions (subject to certain exceptions), (vii) conduct transactions with affiliates and (viii) change our business. In addition, the new senior credit facility will require us to maintain certain financial ratios, including minimum Fixed Charge Coverage and maximum Adjusted Leverage Ratios (all as defined under the new senior credit facility).
Our new senior credit facility contains customary default provisions, including without limitation, a cross default provision pursuant to which it is an event of default under this facility if there is a default under any of our indebtedness having an outstanding principal amount of $5.0 million or more which results in the acceleration of such indebtedness prior to its stated maturity or is caused by a failure to pay principal when due. As of March 30, 2014, we were in compliance with the covenants under our new senior credit facility.
After reserving $7.5 million for letters of credit issued under the new senior credit facility, $78.5 million was available for borrowing under the new senior credit facility at March 30, 2014.
Former Senior Credit Facility. Our former senior secured credit facility, which was terminated on December 11, 2013, provided for aggregate revolving credit borrowings of up to $25.0 million (including $10.0 million available for letters of credit).
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements other than our operating leases, which are primarily for our restaurant properties and not recorded on our consolidated balance sheet.
Application of Critical Accounting Policies
Our unaudited interim condensed consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America. Preparing consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. These estimates and assumptions are affected by the application of our accounting policies. Our significant accounting policies are described in the “Significant Accounting Policies” footnote in the notes to our Consolidated Financial Statements for the year ended December 29, 2013 included in our Annual Report on Form 10-K for the fiscal year ended December 29, 2013. Critical accounting estimates are those that require application of management's most difficult, subjective or complex judgments, often as a result of matters that are inherently uncertain and may change in subsequent periods. There have been no material changes affecting our critical accounting policies for the three months ended March 30, 2014.
Management's Use of Non-GAAP Financial Measures
Adjusted EBITDA is a non-GAAP financial measure. We use Adjusted EBITDA in addition to net income, income from operations, and income before income taxes to assess our performance, and we believe it is important for investors to be able to evaluate the Company using the same measures used by management. We believe this measure is an important indicator of our operational strength and the performance of our business. Adjusted EBITDA as calculated by us is not necessarily comparable to similarly titled measures reported by other companies, and should not be considered as an alternative to net income, earnings per share, cash flows from operating activities or other financial information determined under GAAP.
Adjusted EBITDA is defined as earnings before interest, income taxes, depreciation and amortization, impairment and other lease charges, stock-based compensation expense and other income and expense. Adjusted EBITDA for each of our segments includes an allocation of general and administrative expenses associated with administrative support for executive management, information systems and certain accounting, legal and other administrative functions.
Management believes that such financial measures, when viewed with our results of operations calculated in accordance with GAAP and our reconciliation of Adjusted EBITDA to net income (i) provide useful information about our operating performance and period-over-period growth, (ii) provide additional information that is useful for evaluating the operating performance of our business and (iii) permit investors to gain an understanding of the factors and trends affecting our ongoing earnings, from which capital investments are made and debt is serviced. However, such measures are not measures of financial performance or liquidity under GAAP and, accordingly, should not be considered as alternatives to net income or cash flow from

22


operating activities as indicators of operating performance or liquidity. Also these measures may not be comparable to similarly titled captions of other companies.
All of such non-GAAP financial measures have important limitations as analytical tools. These limitations include the following:
such financial information does not reflect our capital expenditures, future requirements for capital expenditures or contractual commitments to purchase capital equipment;
such financial information does not reflect interest expense or the cash requirements necessary to service principal or interest payments on our debt;
although depreciation and amortization are non-cash charges, the assets that we currently depreciate and amortize will likely have to be replaced in the future, and such financial information does not reflect the cash required to fund such replacements; and
such financial information does not reflect the effect of earning or charges resulting from matters that our management does not consider to be indicative of our ongoing operations. However, some of these charges (such as impairment and other lease charges, other income and expense and stock-based compensation expense) have recurred and may recur.
A reconciliation of Adjusted EBITDA to consolidated net income follows:
 
Three Months Ended
 
March 30, 2014
 
March 31, 2013
Adjusted EBITDA:
 
 
 
Pollo Tropical
$
13,677

 
$
9,805

Taco Cabana
7,103

 
6,528

Consolidated
20,780

 
16,333

Less:
 
 
 
Depreciation and amortization
5,345

 
4,810

Impairment and other lease charges
(15
)
 
95

Interest expense
603

 
5,007

Provision for income taxes
5,413

 
1,693

Stock-based compensation expense
721

 
426

Other income
(6
)
 
(497
)
Net income
$
8,719

 
$
4,799


Forward Looking Statements
This Quarterly Report on Form 10-Q contains “forward-looking” statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. “Forward-looking statements” are any statements that are not based on historical information. Statements other than statements of historical facts included herein, including, without limitation, statements regarding our future financial position and results of operations, business strategy, budgets, projected costs and plans and objectives of management for future operations, are “forward-looking statements.” Forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” “estimate” or “continue” or the negative of such words or variations of such words and similar expressions. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions, which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements and we can give no assurance that such forward-looking statements will prove to be correct. Important factors that could cause actual results to differ materially from those expressed or implied by the forward-looking statements, or “cautionary statements,” include, but are not limited to:
Increases in food and other commodity costs;
Competitive conditions;
Regulatory factors;
Environmental conditions and regulations;
General economic conditions, particularly in the retail sector;

23


Weather conditions;
Fuel prices;
Significant disruptions in service or supply by any of our suppliers or distributors;
Changes in consumer perception of dietary health and food safety;
Labor and employment benefit costs;
The outcome of pending or future legal claims or proceedings;
Our ability to manage our growth and successfully implement our business strategy;
Risks associated with the expansion of our business;
Our borrowing costs;
The availability and terms of necessary or desirable financing or refinancing and other related risks and uncertainties;
The risk of an act of terrorism or escalation of any insurrection or armed conflict involving the United States or any other national or international calamity;
Factors that affect the restaurant industry generally, including product recalls, liability if our products cause injury, ingredient disclosure and labeling laws and regulations, reports of cases of food borne illnesses such as “mad cow” disease and avian flu, and the possibility that consumers could lose confidence in the safety and quality of certain food products, as well as negative publicity regarding food quality, illness, injury or other health concerns; and
The effect of the Spin-off.
Inflation
The inflationary factors that have historically affected our results of operations include increases in food and paper costs, labor and other operating expenses and energy costs. Labor costs in our restaurants are impacted by changes in the Federal and state hourly minimum wage rates as well as changes in payroll related taxes, including Federal and state unemployment taxes. We typically attempt to offset the effect of inflation, at least in part, through periodic menu price increases and various cost reduction programs. However, no assurance can be given that we will be able to fully offset such inflationary cost increases in the future.
ITEM 3—QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There were no material changes from the information presented in Item 7A included in our Annual Report on Form 10-K for the year ended December 29, 2013 with respect to our market risk sensitive instruments.
ITEM 4—CONTROLS AND PROCEDURES
Disclosure Controls and Procedures. Our senior management is responsible for establishing and maintaining disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d - 15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer's management, including its principal executive officer or officers and principal financial officer or officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Evaluation of Disclosure Controls and Procedures. We have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report, with the participation of our Chief Executive Officer and Chief Financial Officer, as well as other key members of our management. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 30, 2014.
No change occurred in our internal control over financial reporting during the first quarter of 2014 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.


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PART II—OTHER INFORMATION

Item 1.    Legal Proceedings
None

Item 1A.    Risk Factors
Part 1 - Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 29, 2013 describes important factors that could cause our actual operating results to differ materially from those indicated or suggested by forward-looking statements made in this Form 10-Q or presented elsewhere by management from time-to-time. There have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 29, 2013.

Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds
None

Item 3.    Defaults Upon Senior Securities
None

Item 4.    Mine Safety Disclosures
Not applicable

Item 5.    Other Information
None


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Item 6.    Exhibits
(a) The following exhibits are filed as part of this report.
 
 
 
Exhibit
No.
  
 
 
 
 
31.1
  
Chief Executive Officer’s Certificate Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for Fiesta Restaurant Group, Inc.
 
 
31.2
  
Chief Financial Officer’s Certificate Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for Fiesta Restaurant Group, Inc.
 
 
32.1
  
Chief Executive Officer’s Certificate Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for Fiesta Restaurant Group, Inc.
 
 
32.2
  
Chief Financial Officer’s Certificate Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for Fiesta Restaurant Group, Inc.
 
 
101.INS
  
XBRL Instance Document
 
 
101.SCH
  
XBRL Taxonomy Extension Schema Document
 
 
101.CAL
  
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
101.DEF
  
XBRL Taxonomy Extension Definition Linkbase Document
 
 
101.LAB
  
XBRL Taxonomy Extension Label Linkbase Document
 
 
101.PRE
  
XBRL Taxonomy Extension Presentation Linkbase Document




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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
FIESTA RESTAURANT GROUP, INC.
 
 
Date: May 6, 2014
/S/    TIMOTHY P. TAFT        
 
(Signature)
 
Timothy P. Taft
Chief Executive Officer
 
 
Date: May 6, 2014
/S/    LYNN S. SCHWEINFURTH   
 
(Signature)
 
Lynn S. Schweinfurth
Vice President, Chief Financial Officer and Treasurer
 
 
Date: May 6, 2014
/S/    ANGELA J. NEWELL
 
(Signature)
 
Angela J. Newell
Vice President, Corporate Controller


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