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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_2014928xq3.htm
EX-31.2 - CHIEF FINANCIAL OFFICER'S CERTIFICATE PURSUANT TO SECTION 302 - Fiesta Restaurant Group, Inc.frgi-ex312_2014928xq3.htm
EX-32.1 - CHIEF EXECUTIVE OFFICER'S CERTIFICATE PURSUANT TO 18 U.S.C. SECTION 1350 - Fiesta Restaurant Group, Inc.frgi-ex321_2014928xq3.htm
EX-31.1 - CHIEF EXECUTIVE OFFICER'S CERTIFICATE PURSUANT TO SECTION 302 - Fiesta Restaurant Group, Inc.frgi-ex311_2014928xq3.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 September 28, 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 October 31, 2014, Fiesta Restaurant Group, Inc. had 26,783,143 shares of its common stock, $.01 par value, outstanding.



FIESTA RESTAURANT GROUP, INC.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUARTER ENDED SEPTEMBER 28, 2014
 
 
 
Page
PART I   FINANCIAL INFORMATION
 
 
 
 
Item 1
 
 
 
 
 
Condensed Consolidated Balance Sheets as of September 28, 2014 and December 29, 2013
 
 
 
 
Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 28, 2014 and September 29, 2013
 
 
 
 
Condensed Consolidated Statements of Changes in Stockholders' Equity for the Nine Months Ended September 28, 2014 and September 29, 2013
 
 
 
 
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 28, 2014 and September 29, 2013
 
 
 
 
 
 
 
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)
 
September 28,
2014
 
December 29,
2013
ASSETS
 
 
 
Current assets:
 
 
 
Cash
$
1,879

 
$
10,978

Trade receivables
8,163

 
6,011

Inventories
2,392

 
2,564

Prepaid rent
2,816

 
2,500

Income tax receivable
1,892

 
4,497

Prepaid expenses and other current assets
3,368

 
3,357

Deferred income taxes
2,699

 
3,018

Total current assets
23,209

 
32,925

Property and equipment, net
180,170

 
144,527

Goodwill
123,484

 
123,484

Intangible assets, net
60

 
121

Deferred income taxes
12,263

 
12,046

Deferred financing costs, net
1,305

 
1,530

Other assets
2,889

 
4,152

Total assets
$
343,380

 
$
318,785

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

 
$
61

Accounts payable
7,721

 
10,802

Accrued interest
146

 
118

Accrued payroll, related taxes and benefits
13,733

 
14,296

Accrued real estate taxes
4,958

 
4,505

Other liabilities
7,232

 
8,305

Total current liabilities
33,851

 
38,087

Long-term debt, net of current portion
67,279

 
72,324

Lease financing obligations
1,659

 
1,657

Deferred income—sale-leaseback of real estate
34,995

 
35,873

Other liabilities
15,772

 
12,538

Total liabilities
153,556

 
160,479

Commitments and contingencies

 

Stockholders' equity:
 
 
 
Common stock, par value $.01; authorized 100,000,000 shares, issued 26,783,515 and 26,710,111 shares, respectively, and outstanding 26,355,748 and 26,082,800 shares, respectively.
264

 
261

Additional paid-in capital
153,092

 
148,765

Retained earnings
36,468

 
9,280

Total stockholders' equity
189,824

 
158,306

Total liabilities and stockholders' equity
$
343,380

 
$
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 AND NINE MONTHS ENDED SEPTEMBER 28, 2014 AND SEPTEMBER 29, 2013
(In thousands of dollars, except share and per share amounts)
(Unaudited)
 
Three Months Ended
 
Nine Months Ended
 
September 28, 2014
 
September 29, 2013
 
September 28, 2014
 
September 29, 2013
Revenues:
 
 
 
 
 
 
 
Restaurant sales
$
154,643

 
$
140,069

 
$
452,983

 
$
413,435

Franchise royalty revenues and fees
655

 
609

 
1,936

 
1,747

Total revenues
155,298

 
140,678

 
454,919

 
415,182

Costs and expenses:
 
 
 
 
 
 
 
Cost of sales
48,980

 
45,162

 
143,469

 
132,891

Restaurant wages and related expenses (including stock-based compensation expense of $20, $1, $50 and $2, respectively)
39,824

 
36,979

 
115,446

 
107,914

Restaurant rent expense
7,314

 
6,853

 
21,892

 
19,699

Other restaurant operating expenses
20,686

 
18,283

 
58,037

 
51,786

Advertising expense
4,180

 
4,271

 
14,275

 
13,275

General and administrative (including stock-based compensation expense of $812, $657, $2,582 and $1,677, respectively)
11,845

 
11,685

 
36,128

 
35,895

Depreciation and amortization
6,038

 
5,129

 
16,961

 
15,117

Pre-opening costs
1,427

 
590

 
3,298

 
2,379

Impairment and other lease charges
183

 
(312
)
 
200

 
239

Other (income) expense
(552
)
 
(57
)
 
(558
)
 
(554
)
Total operating expenses
139,925

 
128,583

 
409,148

 
378,641

Income from operations
15,373

 
12,095

 
45,771

 
36,541

Interest expense
536

 
4,457

 
1,707

 
14,475

Income before income taxes
14,837

 
7,638

 
44,064

 
22,066

Provision for income taxes
5,682

 
2,596

 
16,876

 
7,256

Net income
$
9,155

 
$
5,042

 
$
27,188

 
$
14,810

Basic net income per share
$
0.34

 
$
0.21

 
$
1.02

 
$
0.63

Diluted net income per share
$
0.34

 
$
0.21

 
$
1.02

 
$
0.63

Basic weighted average common shares outstanding
26,344,102

 
22,986,615

 
26,272,322

 
22,921,233

Diluted weighted average common shares outstanding
26,347,326

 
22,986,615

 
26,273,584

 
22,921,233



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
NINE MONTHS ENDED SEPTEMBER 28, 2014 AND SEPTEMBER 29, 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

Capital contributions
 

 

 
96

 

 
96

Stock-based compensation
 

 

 
1,679

 

 
1,679

Vesting of restricted shares and related tax benefit
 
251,676

 
3

 
823

 

 
826

Net income
 

 

 

 
14,810

 
14,810

Balance at September 29, 2013
 
22,999,917

 
$
230

 
$
12,852

 
$
14,833

 
$
27,915

 
 
 
 
 
 
 
 
 
 
 
Balance at December 29, 2013
 
26,082,800

 
$
261

 
$
148,765

 
$
9,280

 
$
158,306

Stock-based compensation
 

 

 
2,632

 

 
2,632

Vesting of restricted shares and related tax benefit
 
272,948

 
3

 
1,725

 

 
1,728

Share issuance costs
 
 
 
 
 
(30
)
 
 
 
(30
)
Net income
 

 

 

 
27,188

 
27,188

Balance at September 28, 2014
 
26,355,748

 
$
264

 
$
153,092

 
$
36,468

 
$
189,824



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
NINE MONTHS ENDED SEPTEMBER 28, 2014 AND SEPTEMBER 29, 2013
(In thousands of dollars)
(Unaudited)
 
Nine Months Ended
 
September 28, 2014
 
September 29, 2013
Cash flows from operating activities:
 
 
 
Net income
$
27,188

 
$
14,810

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 
 
 
Loss (gain) on disposals of property and equipment
(409
)
 
(261
)
Stock-based compensation
2,632

 
1,679

Impairment and other lease charges
200

 
239

Depreciation and amortization
16,961

 
15,117

Amortization of deferred financing costs
231

 
1,194

Amortization of deferred gains from sale-leaseback transactions
(2,754
)
 
(2,588
)
Deferred income taxes
102

 
34

Changes in other operating assets and liabilities
1,619

 
(9,915
)
Net cash provided by operating activities
45,770

 
20,309

Cash flows from investing activities:
 
 
 
Capital expenditures:
 
 
 
New restaurant development
(45,161
)
 
(28,442
)
Restaurant remodeling
(6,635
)
 
(2,602
)
Other restaurant capital expenditures
(3,930
)
 
(4,152
)
Corporate and restaurant information systems
(3,212
)
 
(3,595
)
Total capital expenditures
(58,938
)
 
(38,791
)
Properties purchased for sale-leaseback

 
(4,438
)
Proceeds from sale-leaseback transactions
5,692

 
10,774

Proceeds from sales of other properties
1,729

 
1,734

Net cash used in investing activities
(51,517
)
 
(30,721
)
Cash flows from financing activities:
 
 
 
Excess tax benefit from vesting of restricted shares
1,728

 
826

Share issuance costs
(30
)
 

Borrowings on revolving credit facility
23,000

 

Repayments on revolving credit facility
(28,000
)
 

Principal payments on capital leases
(44
)
 
(46
)
Other
(6
)
 
(15
)
Net cash provided by (used in) financing activities
(3,352
)
 
765

Net decrease in cash
(9,099
)
 
(9,647
)
Cash, beginning of period
10,978

 
15,533

Cash, end of period
$
1,879

 
$
5,886

Supplemental disclosures:
 
 
 
Interest paid on long-term debt
$
1,493

 
$
18,172

Interest paid on lease financing obligations
$
104

 
$
191

Accruals for capital expenditures
$
2,113

 
$
2,123

Income tax payments, net
$
12,442

 
$
7,106

Non-cash capital contribution from former parent
$

 
$
96


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 September 28, 2014, the Company owned and operated 119 Pollo Tropical® restaurants, of which 107 were located in Florida, five were located in Georgia, two were located in Tennessee, and five were located in Texas, and franchised a total of 36 Pollo Tropical restaurants, including 17 in Puerto Rico, one in Ecuador, one in Honduras, one in The Bahamas, two in Trinidad & Tobago, two in Venezuela, five in Panama, one in the Dominican Republic, one in Guatemala and five on college campuses in Florida. At September 28, 2014, the Company also owned and operated 166 Taco Cabana® restaurants, of which 162 were located in Texas, three were located in Oklahoma and one restaurant under the elevated non-24 hour Taco Cabana format, Cabana Grill®, was located in Georgia, and franchised a total of seven Taco Cabana restaurants, including four in New Mexico, and three non-traditional locations on college campuses 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 and nine months ended September 28, 2014 and September 29, 2013 each contained thirteen and thirty-nine weeks, respectively.
Basis of Presentation. The accompanying unaudited condensed consolidated financial statements for the three and nine months ended September 28, 2014 and September 29, 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 and nine months ended September 28, 2014 and September 29, 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 September 28, 2014, was approximately $66.0 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 September 28, 2014, there were $66.0 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 0.50% as of September 28, 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 1.50% at September 28, 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 0.25% at September 28, 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 the 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 September 28, 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, $76.5 million was available for borrowing at September 28, 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:
 
September 28, 2014
 
December 29, 2013
Accrued occupancy costs
$
11,709

 
$
9,973

Accrued workers’ compensation and general liability claims
1,475

 
729

Deferred compensation
1,122

 
593

Other
1,466

 
1,243

 
$
15,772

 
$
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 $1.0 million and $1.1 million are included in long-term accrued occupancy costs above at September 28, 2014 and December 29, 2013, with the remainder in other current liabilities:
 
Nine Months Ended September 28, 2014
 
Year Ended December 29, 2013
Balance, beginning of period
$
1,439

 
$
2,432

Provisions for restaurant closures

 

Recoveries, net of additional lease charges
(128
)
 
(197
)
Payments, net
(205
)
 
(937
)
Other adjustments
97

 
141

Balance, end of period
$
1,203

 
$
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 December 29, 2013, Carrols owed $0.3 million 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 entered into the following agreements:

9

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


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 ("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 and nine months ended September 29, 2013, the Company recognized expenses of $0.3 million and $2.7 million, respectively, 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 and nine months ended September 28, 2014 and September 29, 2013:
 
Three Months Ended
 
Nine Months Ended
 
September 28, 2014
 
September 29, 2013
 
September 28, 2014
 
September 29, 2013
Current
$
5,420

 
$
2,539

 
$
16,774

 
$
7,222

Deferred
262

 
57

 
102

 
34

 
$
5,682

 
$
2,596

 
$
16,876

 
$
7,256

The provision for income taxes for the three and nine months ended September 28, 2014 was derived using an estimated effective annual income tax rate for 2014 of 38.3%. There were no discrete tax adjustments in the nine months ended September 28, 2014.
The provision for income taxes for the three and nine months ended September 29, 2013 was derived using an estimated effective annual income tax rate for 2013 of 36.5%, 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 nine months ended September 29, 2013. Other discrete tax adjustments decreased the provision for income taxes by $0.2 million in the three and nine months ended September 29, 2013.

10

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


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 and nine months ended September 28, 2014 and September 29, 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. Stock compensation expense on all non-vested restricted Carrols and Fiesta stock awards held by the Company's employees is recorded by the Company.
During the nine months ended September 28, 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 nine months ended September 28, 2014 was $45.04. Also during the nine months ended September 28, 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 nine months ended September 28, 2014 was $45.04.
During the nine months ended September 28, 2014, the Company granted 8,399 non-vested restricted shares to non-employee directors. The weighted average fair value at the grant date for restricted non-vested shares issued to directors was $37.23. These shares vest and become non-forfeitable over a one year vesting period.
During the nine months ended September 29, 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 nine months ended September 29, 2013 was $20.54. During the nine months ended September 29, 2013, the Company granted 8,843 non-vested restricted shares to non-employee directors. The weighted average fair value at the grant date for restricted non-vested shares issued to directors was $35.36. These shares vested and became non-forfeitable over a one year vesting period.
Stock-based compensation expense for the three and nine months ended September 28, 2014 was $0.8 million and $2.6 million, respectively. Stock-based compensation expense for the three and nine months ended September 29, 2013 was $0.7 million and $1.7 million, respectively. As of September 28, 2014, the total unrecognized stock-based compensation expense relating to non-vested restricted shares and non-vested restricted stock units was approximately $7.2 million. At September 28, 2014, the remaining weighted average vesting period for non-vested restricted shares and non-vested restricted stock units was 2.0 years.
 
 Non-vested Shares
 A summary of all non-vested restricted share activity for the nine months ended September 28, 2014 was as follows:
 
 
 
Weighted
 
 
 
Average
 
 
 
Grant Date
 
Shares
 
Price
Non-vested at December 29, 2013
627,311

 
$
14.81

Granted
80,290

 
44.22

Vested
(272,785
)
 
14.36

Forfeited
(7,049
)
 
19.09

Non-vested at September 28, 2014
427,767

 
$
20.54


The fair value of the non-vested restricted shares is based on the closing price on the date of grant.

11

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


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.
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
September 28, 2014:
 
 
 
 
 
 
 
 
Restaurant sales
 
$
77,887

 
$
76,756

 
$

 
$
154,643

Franchise revenue
 
520

 
135

 

 
655

Cost of sales
 
25,939

 
23,041

 

 
48,980

Restaurant wages and related expenses (1)
 
17,681

 
22,143

 

 
39,824

Restaurant rent expense
 
3,051

 
4,263

 

 
7,314

Other restaurant operating expenses
 
10,110

 
10,576

 

 
20,686

Advertising expense
 
2,097

 
2,083

 

 
4,180

General and administrative expense (2)
 
6,526

 
5,319

 

 
11,845

Depreciation and amortization
 
3,104

 
2,934

 

 
6,038

Pre-opening costs
 
1,318

 
109

 

 
1,427

Impairment and other lease charges
 
183

 

 

 
183

Interest expense
 
252

 
284

 

 
536

Income before taxes
 
8,146

 
6,691

 

 
14,837

Capital expenditures
 
17,397

 
5,009

 
508

 
22,914

September 29, 2013:
 
 
 
 
 
 
 
 
Restaurant sales
 
$
65,994

 
$
74,075

 
$

 
$
140,069

Franchise revenue
 
484

 
125

 

 
609

Cost of sales
 
21,960

 
23,202

 

 
45,162

Restaurant wages and related expenses (1)
 
14,966

 
22,013

 

 
36,979

Restaurant rent expense
 
2,625

 
4,228

 

 
6,853

Other restaurant operating expenses
 
8,236

 
10,047

 

 
18,283

Advertising expense
 
1,710

 
2,561

 

 
4,271

General and administrative expense (2)
 
6,106

 
5,579

 

 
11,685

Depreciation and amortization
 
2,367

 
2,762

 

 
5,129

Pre-opening costs
 
476

 
114

 

 
590

Impairment and other lease charges
 
(37
)
 
(275
)
 

 
(312
)
Interest expense
 
1,937

 
2,520

 

 
4,457

Income before taxes
 
6,132

 
1,506

 

 
7,638

Capital expenditures
 
6,832

 
2,892

 
1,298

 
11,022



12

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


Nine Months Ended
 
Pollo Tropical
 
Taco Cabana
 
Other
 
Consolidated
September 28, 2014:
 
 
 
 
 
 
 
 
Restaurant sales
 
$
224,496

 
$
228,487

 
$

 
$
452,983

Franchise revenue
 
1,550

 
386

 

 
1,936

Cost of sales
 
74,151

 
69,318

 

 
143,469

Restaurant wages and related expenses (1)
 
49,369

 
66,077

 

 
115,446

Restaurant rent expense
 
9,039

 
12,853

 

 
21,892

Other restaurant operating expenses
 
27,909

 
30,128

 

 
58,037

Advertising expense
 
5,698

 
8,577

 

 
14,275

General and administrative expense (2)
 
19,186

 
16,942

 

 
36,128

Depreciation and amortization
 
8,431

 
8,530

 

 
16,961

Pre-opening costs
 
2,819

 
479

 

 
3,298

Impairment and other lease charges
 
113

 
87

 

 
200

Interest expense
 
801

 
906

 

 
1,707

Income before taxes
 
28,530

 
15,534

 

 
44,064

Capital expenditures
 
41,520

 
14,780

 
2,638

 
58,938

September 29, 2013:
 
 
 
 
 
 
 
 
Restaurant sales
 
$
192,372

 
$
221,063

 
$

 
$
413,435

Franchise revenue
 
1,380

 
367

 

 
1,747

Cost of sales
 
63,803

 
69,088

 

 
132,891

Restaurant wages and related expenses (1)
 
43,466

 
64,448

 

 
107,914

Restaurant rent expense
 
7,220

 
12,479

 

 
19,699

Other restaurant operating expenses
 
22,849

 
28,937

 

 
51,786

Advertising expense
 
4,432

 
8,843

 

 
13,275

General and administrative expense (2)
 
18,573

 
17,322

 

 
35,895

Depreciation and amortization
 
6,780

 
8,337

 

 
15,117

Pre-opening costs
 
1,706

 
673

 

 
2,379

Impairment and other lease charges
 
(99
)
 
338

 

 
239

Interest expense
 
6,436

 
8,039

 

 
14,475

Income before taxes
 
19,083

 
2,983

 

 
22,066

Capital expenditures
 
21,527

 
13,985

 
3,279

 
38,791

Identifiable Assets:
 
 
 
 
 
 
 
 
September 28, 2014:
 
$
171,867

 
$
163,236

 
$
8,277

 
$
343,380

December 29, 2013
 
140,797

 
169,367

 
8,621

 
318,785


(1) Includes stock-based compensation expense of $20 and $50 for the three and nine months ended September 28, 2014, respectively, and $1 and $2 for the three and nine months ended September 29, 2013, respectively.
(2) Includes stock-based compensation expense of $812 and $2,582 for the three and nine months ended September 28, 2014, respectively, and $657 and $1,677 for the three and nine months ended September 29, 2013, respectively.


13

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 and nine months ended September 28, 2014 and September 29, 2013 is as follows:
 
  
Three Months Ended
 
Nine Months Ended
 
  
September 28, 2014
 
September 29, 2013
 
September 28, 2014
 
September 29, 2013
Basic and diluted net income per share:
  
 
 
 
 
 
 
 
Net income
  
$
9,155

 
$
5,042

 
$
27,188

 
$
14,810

Less: income allocated to participating securities
  
(150
)
 
(140
)
 
(504
)
 
(451
)
Net income available to common stockholders
  
$
9,005

 
$
4,902

 
$
26,684

 
$
14,359

Weighted average common shares, basic
 
26,344,102

 
22,986,615

 
26,272,322

 
22,921,233

Restricted stock units
 
3,224

 

 
1,262

 

Weighted average common shares, diluted
  
26,347,326

 
22,986,615

 
26,273,584

 
22,921,233

Basic net income per common share
  
$
0.34

 
$
0.21

 
$
1.02

 
$
0.63

Diluted net income per common share
 
$
0.34

 
$
0.21

 
$
1.02

 
$
0.63

 
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 has early adopted this standard. Adoption of this standard did not have a material impact on our condensed consolidated financial statements.

14

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


In May 2014, the Financial Accounting Standards Board issued ASU 606, Revenue Recognition - Revenue from Contracts with Customers, which amends the guidance in former ASC 605, Revenue Recognition, and provides for either a full retrospective adoption in which the standard is applied to all of the periods presented or a modified retrospective adoption in which the cumulative effect of initially applying the standard is recognized at the date of initial application. The new standard provides accounting guidance for all revenue arising from contracts with customers and affects all entities that enter into contracts to provide goods or services to their customers unless the contracts are in the scope of other US GAAP requirements. The guidance also provides a model for the measurement and recognition of gains and losses on the sale of certain nonfinancial assets, such as property and equipment, including real estate. The Company is currently evaluating the impact of the provisions of ASC 606. However, the Company currently expects the provisions to primarily impact certain franchise revenues and does not expect the standard to have a material effect on its financial statements. For the Company, the new standard is effective for interim and annual periods beginning after December 15, 2016.




15


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.
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, Inc. 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, Inc. (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 and nine months ended September 28, 2014 and September 29, 2013 each contained thirteen and thirty-nine weeks, respectively. The fiscal year ending December 28, 2014 will contain 52 weeks and the fiscal year ending January 3, 2016 will contain 53 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, almost all of our restaurants offer the convenience of drive-thru service. As of September 28, 2014, our company-owned restaurants included 119 Pollo Tropical restaurants and 166 Taco Cabana restaurants, including one Cabana Grill® (our elevated non-24 hour Taco Cabana format) restaurant.
We franchise our Pollo Tropical restaurants primarily internationally and, as of September 28, 2014, we had 36 franchised Pollo Tropical restaurants located in Puerto Rico, Ecuador, Honduras, Trinidad & Tobago, The Bahamas, Venezuela, Panama, the Dominican Republic, Guatemala and on college campuses in Florida. We have agreements for the continued development of franchised Pollo Tropical restaurants in certain of our existing franchised markets, and we have commitments for additional non-traditional locations in Florida. As of September 28, 2014, we had four Taco Cabana franchised restaurants located in New Mexico and three non-traditional Taco Cabana locations on college campuses 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 (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 September 28, 2014, there was $66.0 million in outstanding borrowings under our new senior credit facility.

16


Interest expense decreased $3.9 million and $12.7 million in the three and nine months ended September 28, 2014 as a result of the refinancing, repurchase and redemption of our Notes, net of capitalized interest.
Executive Summary-Consolidated Operating Performance for the Three Months Ended September 28, 2014
Our third quarter 2014 results and highlights include the following:

Net income increased $4.1 million to $9.2 million in the third quarter of 2014, or $0.34 per diluted share, compared to net income of $5.0 million, or $0.21 per diluted share in the third 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 10.4% in the third quarter of 2014 to $155.3 million compared to $140.7 million in the third quarter of 2013, driven primarily by an increase in the number of our company-owned restaurants and an increase in comparable restaurant sales of 5.9% for our Pollo Tropical restaurants and 3.5% for our Taco Cabana restaurants. The growth in comparable restaurant sales resulted primarily from an increase in average check of 1.3% at Pollo Tropical and 2.6% at Taco Cabana and an increase in transactions of 4.6% at Pollo Tropical and 0.9% at Taco Cabana.

During the third quarter of 2014, we opened seven new company-owned Pollo Tropical restaurants and two new company-owned Taco Cabana restaurants and closed two company-owned Taco Cabana restaurants. During the third quarter of 2013, we opened four new company-owned Pollo Tropical restaurants.

Adjusted EBITDA increased $4.4 million in the third quarter of 2014 to $21.9 million compared to $17.5 million in the third 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".


17


Results of Operations
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 29, 2014
106

 
39

 
145

 
165

 
7

 
172

   New
6

 

 
6

 
1

 

 
1

   Closed

 
(4
)
 
(4
)
 

 

 

June 29, 2014
112

 
35

 
147

 
166

 
7

 
173

   New
7

 
3

 
10

 
2

 

 
2

   Closed

 
(2
)
 
(2
)
 
(2
)
 

 
(2
)
September 28, 2014
119

 
36

 
155

 
166

 
7

 
173

 
 
 
 
 
 
 
 
 
 
 
 
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

   New
4

 
3

 
7

 
3

 

 
3

   Closed
(1
)
 
(1
)
 
(2
)
 
(1
)
 

 
(1
)
June 30, 2013
96

 
38

 
134

 
164

 
8

 
172

   New
4

 
2

 
6

 

 

 

   Closed

 
(2
)
 
(2
)
 

 

 

September 29, 2013
100

 
38

 
138

 
164

 
8

 
172

 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 28, 2014 Compared to Three Months Ended September 29, 2013
The following table sets forth, for the three months ended September 28, 2014 and September 29, 2013, selected consolidated operating results as a percentage of consolidated restaurant sales and selected segment operating results as a percentage of applicable segment restaurant sales:
 
Three Months Ended
 
September 28, 2014
 
September 29, 2013
 
September 28, 2014
 
September 29, 2013
 
September 28, 2014
 
September 29, 2013
 
Pollo Tropical
 
Taco Cabana
 
Consolidated
Restaurant sales:
 
 
 
 
 
 
 
 
 
 
 
Pollo Tropical
 
 
 
 
 
 
 
 
50.4
%
 
47.1
%
Taco Cabana
 
 
 
 
 
 
 
 
49.6
%
 
52.9
%
Consolidated restaurant sales
 
 
 
 
 
 
 
 
100.0
%
 
100.0
%
Costs and expenses:
 
 
 
 
 
 
 
 
 
 
 
Cost of sales
33.3
%
 
33.3
%
 
30.0
%
 
31.3
%
 
31.7
%
 
32.2
%
Restaurant wages and related expenses
22.7
%
 
22.7
%
 
28.8
%
 
29.7
%
 
25.8
%
 
26.4
%
Restaurant rent expense
3.9
%
 
4.0
%
 
5.6
%
 
5.7
%
 
4.7
%
 
4.9
%
Other restaurant operating expenses
13.0
%
 
12.5
%
 
13.8
%
 
13.6
%
 
13.4
%
 
13.1
%
Advertising expense
2.7
%
 
2.6
%
 
2.7
%
 
3.5
%
 
2.7
%
 
3.0
%
Pre-opening costs
1.7
%
 
0.7
%
 
0.1
%
 
0.2
%
 
0.9
%
 
0.4
%

18


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 10.4% to $155.3 million in the third quarter of 2014 from $140.7 million in the third quarter of 2013. Restaurant sales also increased 10.4% to $154.6 million in the third quarter of 2014 from $140.1 million in the third 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 third quarter of 2014 compared to the third quarter of 2013 (in millions):
Pollo Tropical:
 
Increase in comparable restaurant sales
$
3.6

Impact of new restaurants, net of closed restaurants
8.3

   Total increase
$
11.9

 
 
Taco Cabana:
 
Increase in comparable restaurant sales
$
2.5

Impact of new restaurants, net of closed restaurants, and other
0.2

   Total increase
$
2.7

Comparable restaurant sales for Pollo Tropical increased 5.9% in the third quarter of 2014. Comparable restaurant sales for Taco Cabana in the third quarter of 2014 increased 3.5%. 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 third quarter of 2014 as compared to the third quarter of 2013. For Taco Cabana, menu price increases drove an increase in restaurant sales of 1.1% in the third quarter of 2014 as compared to the third 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 during the first quarter of 2014.
Restaurants in new markets that haven't reached media efficiency generally have lower sales than restaurants in existing, media efficient markets.
Franchise revenues increased slightly to $0.7 million in the third quarter of 2014 from $0.6 million in the third 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.

19


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 third quarter of 2014 compared to the third quarter of 2013. All percentages are stated as a percentage of applicable segment restaurant sales.
Pollo Tropical:
 
Cost of sales:
 
   Menu price increases
(0.5
)%
   Higher commodity costs
0.4
 %
 Other
0.1
 %
      Net change in cost of sales as a percentage of restaurant sales
 %
 
 
Restaurant wages and related expenses:
 
   Impact of higher sales volumes on fixed labor costs for comparable stores
(0.5
)%
   Lower medical costs
(0.3
)%
   Higher labor costs and impact of lower sales volumes for new stores
0.6
 %
   Higher workers' compensation costs
0.5
 %
   Other
(0.3
)%
      Net change in restaurant wages and related costs as a percentage of restaurant sales
 %
 
 
Other operating expenses:
 
   Higher repairs and maintenance costs
0.6
 %
   Lower insurance costs
(0.4
)%
   Other (1)
0.3
 %
      Net increase in other restaurant operating expenses as a percentage of restaurant sales
0.5
 %
 
 
Advertising expense:
 
   Increase in advertising and timing of promotions
0.1
 %
      Net increase in advertising expense as a percentage of restaurant sales
0.1
 %
 
 
Pre-opening costs:
 
   Increased number of restaurant openings
1.0
 %
      Net increase in pre-opening costs as a percentage of restaurant sales
1.0
 %
(1) Includes higher costs related to operating supplies, general and office expense, linen and uniforms and various other costs.

20


Taco Cabana:
 
Cost of sales:
 
   Menu board changes, sales mix and lower waste
(1.2
)%
   Menu price increases
(0.3
)%
   Higher rebates and discounts
(0.2
)%
   Higher commodity costs
0.6
 %
   Other
(0.2
)%
      Net decrease in cost of sales as a percentage of restaurant sales
(1.3
)%
 
 
Restaurant wages and related expenses:
 
   Impact of higher sales volumes on fixed labor costs
(0.3
)%
   Lower medical costs
(0.5
)%
   Other
(0.1
)%
      Net decrease in restaurant wages and related costs as a percentage of restaurant sales
(0.9
)%
 
 
Other operating expenses:
 
   Lower insurance costs
(0.3
)%
   Higher repairs and maintenance expense
0.4
 %
   Other
0.1
 %
      Net increase in other restaurant operating expenses as a percentage of restaurant sales
0.2
 %
 
 
Advertising expense:
 
   Timing of promotions
(0.8
)%
      Net decrease in advertising expense as a percentage of restaurant sales
(0.8
)%
 
 
Pre-opening costs:
 
  Impact of higher sales
(0.1
)%
      Decrease in pre-opening costs as a percentage of restaurant sales
(0.1
)%

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, decreased to 4.7% in the third quarter of 2014 from 4.9% in the third quarter of 2013 primarily as a result of the impact of higher sales, partially offset by 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 transition services agreement with the former parent company for administrative support services.
General and administrative expenses were $11.8 million in the third quarter of 2014 and $11.7 million in the third quarter of 2013. As a percentage of total revenues, general and administrative expenses decreased to 7.6% in the third quarter of 2014 compared to 8.3% in the third quarter of 2013. The decrease was due primarily to the impact of higher sales on fixed costs and the benefit of a $0.5 million payment received in the third quarter of 2014 as a settlement of a litigation matter.
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-

21


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 $12.1 million in the third quarter of 2014 from $10.7 million in the third quarter of 2013 due primarily to the net impact of the increase in revenues. Adjusted EBITDA for Taco Cabana increased to $9.8 million in the third quarter of 2014 from $6.8 million in the third quarter of 2013 also primarily due to the net impact of the increase in revenues.
Depreciation and Amortization. Depreciation and amortization expense increased to $6.0 million in the third quarter of 2014 from $5.1 million in the third quarter of 2013 due primarily to increased depreciation relating to new company-owned restaurant openings, partially offset by the impact of new sale-leaseback transactions.
Interest Expense. Interest expense decreased $3.9 million to $0.5 million in the third quarter of 2014 from $4.5 million in the third 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 credit borrowings at lower interest rates than the Notes, as described above under "Recent and Future Events Affecting our Results of Operations".
Impairment and Other Lease Charges. Impairment and other lease charges in the third quarter of 2014 consisted of a $0.2 million impairment charge representing the write-down of the carrying value to fair value of certain assets as a result of a management decision to relocate a Pollo Tropical restaurant before the end of its lease term to a superior site in the same trade area. Related lease termination costs will be incurred in a future period when we cease using the leased property. This charge was partially offset by recoveries of additional sublease income of less than $0.1 million related to two previously closed Pollo Tropical locations.
Each quarter we assess the potential impairment of any long-lived assets that have experienced a triggering event, including restaurants for which the related cash flows are below a certain threshold. After reviewing the specific cash flows and management’s plans related to the restaurants for which an impairment review was performed, we determined that no impairment was currently necessary. However, for two Pollo Tropical restaurants, the projected cash flows were not substantially in excess of their carrying values. In addition, there was one Taco Cabana restaurant that was significantly impacted by road construction, for which the projected cash flows were not substantially in excess of its carrying value. If the performance of these restaurants does not improve as projected, an impairment charge could be recognized in future periods, and such charge could be material.
Other (Income) Expense. Other income in the third quarter of 2014 consisted of a $0.6 million gain from a condemnation award resulting from an eminent domain proceeding related to a location that closed in the third quarter of 2014.
Provision for Income Taxes. The provision for income taxes for the third 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 third quarter of 2013 was derived using an estimated effective annual income tax rate for 2013 of 36.5%, excluding discrete items. The estimated effective annual income tax rate for 2014 is higher than the effective annual income tax rate estimated in the third quarter of 2013, primarily due to the expiration of the Work Opportunity Tax Credit on December 31, 2013.
Discrete tax adjustments decreased the provision for income taxes by $0.2 million in the third quarter of 2013. There were no discrete tax adjustments in the third quarter of 2014.
Net Income. As a result of the foregoing, we had net income of $9.2 million in the third quarter of 2014 compared to net income of $5.0 million in the third quarter of 2013.

22


Nine Months Ended September 28, 2014 Compared to Nine Months Ended September 29, 2013
The following table sets forth, for the nine months ended September 28, 2014 and September 29, 2013, selected consolidated operating results as a percentage of consolidated restaurant sales and selected segment operating results as a percentage of applicable segment restaurant sales:
 
Nine Months Ended
 
September 28, 2014
 
September 29, 2013
 
September 28, 2014
 
September 29, 2013
 
September 28, 2014
 
September 29, 2013
 
Pollo Tropical
 
Taco Cabana
 
Consolidated
Restaurant sales:
 
 
 
 
 
 
 
 
 
 
 
Pollo Tropical
 
 
 
 
 
 
 
 
49.6
%
 
46.5
%
Taco Cabana
 
 
 
 
 
 
 
 
50.4
%
 
53.5
%
Consolidated restaurant sales
 
 
 
 
 
 
 
 
100.0
%
 
100.0
%
Costs and expenses:
 
 
 
 
 
 
 
 
 
 
 
Cost of sales
33.0
%
 
33.2
%
 
30.3
%
 
31.3
%
 
31.7
%
 
32.1
%
Restaurant wages and related expenses
22.0
%
 
22.6
%
 
28.9
%
 
29.2
%
 
25.5
%
 
26.1
%
Restaurant rent expense
4.0
%
 
3.8
%
 
5.6
%
 
5.6
%
 
4.8
%
 
4.8
%
Other restaurant operating expenses
12.4
%
 
11.9
%
 
13.2
%
 
13.1
%
 
12.8
%
 
12.5
%
Advertising expense
2.5
%
 
2.3
%
 
3.8
%
 
4.0
%
 
3.2
%
 
3.2
%
Pre-opening costs
1.3
%
 
0.9
%
 
0.2
%
 
0.3
%
 
0.7
%
 
0.6
%
Total revenues increased 9.6% to $454.9 million in the nine months ended September 28, 2014 from $415.2 million in the nine months ended September 29, 2013. Restaurant sales also increased 9.6% to $453.0 million in the nine months ended September 28, 2014 from $413.4 million in the nine months ended September 29, 2013. The following table presents the primary drivers of the increase in restaurant sales for both Pollo Tropical and Taco Cabana for the nine months ended September 28, 2014 compared to the nine months ended September 29, 2013 (in millions):
Pollo Tropical:
 
Increase in comparable restaurant sales
$
11.5

Impact of new restaurants, net of closed restaurants
20.6

   Total increase
$
32.1

 
 
Taco Cabana:
 
Increase in comparable restaurant sales
$
5.0

Impact of new restaurants, net of closed restaurants, and other
2.4

   Total increase
$
7.4

Comparable restaurant sales for Pollo Tropical increased 6.3% in the nine months ended September 28, 2014. Comparable restaurant sales for Taco Cabana in the nine months ended September 28, 2014 increased 2.4%. For Pollo Tropical, menu price increases drove an increase in restaurant sales of 1.6% in the nine months ended September 28, 2014 as compared to the nine months ended September 29, 2013. For Taco Cabana, menu price increases drove an increase in restaurant sales of 1.2% in the nine months ended September 28, 2014 as compared to the nine months ended September 29, 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 during the first quarter of 2014.
Restaurants in new markets that haven't reached media efficiency generally have lower sales than restaurants in existing, media efficient markets.
Franchise revenues increased slightly to $1.9 million in the nine months ended September 28, 2014 from $1.7 million in the nine months ended September 29, 2013.

23


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 nine months ended September 28, 2014 compared to the nine months ended September 29, 2013. All percentages are stated as a percentage of applicable segment restaurant sales.
Pollo Tropical:
 
Cost of sales:
 
   Menu price increases
(0.5
)%
   Higher commodity costs
0.2
 %
   Other
0.1
 %
      Net decrease in cost of sales as a percentage of restaurant sales
(0.2
)%
 
 
Restaurant wages and related expenses:
 
   Lower workers compensation claim costs
(0.2
)%
   Lower medical benefit cost and employment taxes
(0.3
)%
   Impact of higher sales volumes on fixed labor costs for comparable stores
(0.4
)%
   Higher labor costs and impact of lower sales volumes for new stores
0.4
 %
   Other
(0.1
)%
      Net decrease in restaurant wages and related costs as a percentage of restaurant sales
(0.6
)%
 
 
Other operating expenses:
 
   Higher repairs and maintenance costs (1)
0.4
 %
   Other (2)
0.1
 %
      Net increase in other restaurant operating expenses as a percentage of restaurant sales
0.5
 %
 
 
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 number of restaurants opened
0.4
 %
      Net increase in pre-opening costs as a percentage of restaurant sales
0.4
 %
(1) Includes additional costs related to the conversion to Coca-Cola products under a new five year contract.
(2) Includes higher costs related to operating supplies, general and office expense, and credit card expenses.


24


Taco Cabana:
 
Cost of sales:
 
   Menu board changes, sales mix and lower waste
(1.0
)%
   Menu price increases
(0.4
)%
   Higher rebates and discounts
(0.2
)%
   Higher commodity costs
0.8
 %
   Other
(0.2
)%
      Net decrease in cost of sales as a percentage of restaurant sales
(1.0
)%
 
 
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 repairs and maintenance expense (1)
0.3
 %
   Other
(0.2
)%
      Net increase in other restaurant operating expenses as a percentage of restaurant sales
0.1
 %
 
 
Advertising expense:
 
   Timing of promotions and impact of higher sales
(0.2
)%
      Net decrease in advertising expense as a percentage of restaurant sales
(0.2
)%
 
 
Pre-opening costs:
 
   Impact of higher sales
(0.1
)%
      Net decrease in pre-opening costs as a percentage of restaurant sales
(0.1
)%
(1) Includes costs associated with remodels that are not subject to capitalization.
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, was 4.8% in both the nine months ended September 28, 2014 and September 29, 2013. The impact of new sale-leaseback transactions and new restaurants, which generally have higher rent, was offset by the impact of higher sales.
Consolidated General and Administrative Expenses. General and administrative expenses were $36.1 million in the nine months ended September 28, 2014 and $35.9 million in the nine months ended September 29, 2013. As a percentage of total revenues, general and administrative expenses decreased to 7.9% in the nine months ended September 28, 2014 compared to 8.6% in the nine months ended September 29, 2013. The decrease was due primarily to the impact of higher sales on fixed costs. General and administrative expenses also include the benefit of a $0.5 million payment received in the nine months ended September 28, 2014 as a settlement of a litigation matter.
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 $39.2 million in the nine months ended September 28, 2014 from $32.5 million in the nine months ended September 29, 2013 due primarily to the net impact of the increase in revenues. Adjusted EBITDA for Taco Cabana increased to $25.8 million in the nine months ended September 28, 2014 from $20.5 million in the nine months ended September 29, 2013 also primarily due to the net impact of the increase in revenues.

25


Depreciation and Amortization. Depreciation and amortization expense increased to $17.0 million in the nine months ended September 28, 2014 from $15.1 million in the nine months ended September 29, 2013 due primarily to increased depreciation relating to new company-owned restaurant openings, partially offset by the impact of new sale-leaseback transactions.
Impairment and Other Lease Charges. Impairment and other lease charges in the nine months ended September 28, 2014 consisted of a $0.1 million impairment related to two Taco Cabana locations and a $0.2 million impairment charge representing the write-down of the carrying value to fair value of certain assets as a result of a management decision to relocate a Pollo Tropical restaurant before the end of its lease term to a superior site in the same trade area. Related lease termination costs will be incurred in a future period when we cease using the leased property. These charges were partially offset by recoveries of additional sublease income of $0.1 million related to two previously closed Pollo Tropical locations.
Each quarter we assess the potential impairment of any long-lived assets that have experienced a triggering event, including restaurants for which the related cash flows are below a certain threshold. After reviewing the specific cash flows and management’s plans related to the restaurants for which an impairment review was performed, we determined that no impairment was currently necessary. However, for two Pollo Tropical restaurants, the projected cash flows were not substantially in excess of their carrying values. In addition, there was one Taco Cabana restaurant that was significantly impacted by road construction, for which the projected cash flows were not substantially in excess of its carrying value. If the performance of these restaurants does not improve as projected, an impairment charge could be recognized in future periods, and such charge could be material.
Other (Income) Expense. Other income in the nine months ended September 28, 2014 primarily consisted of a $0.6 million gain from a condemnation award resulting from an eminent domain proceeding related to a location that closed in the third quarter of 2014. Other income of $0.6 million in the nine months ended September 29, 2013 consists primarily of the gain on sale of a previously closed location.
Interest Expense. Interest expense decreased $12.8 million to $1.7 million in the nine months ended September 28, 2014 from $14.5 million in the nine months ended September 29, 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 credit 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 nine months ended September 28, 2014 was derived using an estimated effective annual income tax rate for 2014 of 38.3%, while the provision for income taxes for the nine months ended September 29, 2013 was derived using an estimated effective annual income tax rate for 2013 of 36.5%, excluding discrete items. The estimated effective annual income tax rate for 2014 is higher than the effective annual income tax rate estimated in the nine months ended September 29, 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 $0.8 million in the nine months ended September 29, 2013. There were no discrete tax adjustments in the nine months ended September 28, 2014.
Net Income. As a result of the foregoing, we had net income of $27.2 million in the nine months ended September 28, 2014 compared to net income of $14.8 million in the nine months ended September 29, 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 in the first nine months of 2014 and 2013 was $45.8 million and $20.3 million, respectively. The increase in net cash provided by operating activities in the first nine months 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 herein and above under "Recent and Future Events Affecting our Results of Operations".

26


Investing Activities. Net cash used for investing activities in the first nine months of 2014 and 2013 was $51.5 million and $30.7 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.
The following table sets forth our capital expenditures for the periods presented (in thousands):
 
Pollo
Tropical
 
Taco
Cabana
 
Other
 
Consolidated
Nine Months Ended September 28, 2014
 
 
 
 
 
 
 
New restaurant development
$
38,912

 
$
6,249

 
$

 
$
45,161

Restaurant remodeling

 
6,635

 

 
6,635

Other restaurant capital expenditures (1)
2,411

 
1,519

 

 
3,930

Corporate and restaurant information systems
197

 
377