FRGI-2015.3.29-10Q
Table of Contents

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 29, 2015
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 April 24, 2015, Fiesta Restaurant Group, Inc. had 26,823,067 shares of its common stock, $.01 par value, outstanding.

Table of Contents

FIESTA RESTAURANT GROUP, INC.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUARTER ENDED MARCH 29, 2015
 
 
 
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
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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 29,
2015
 
December 28,
2014
ASSETS
 
 
 
Current assets:
 
 
 
Cash
$
3,523

 
$
5,087

Trade receivables
9,538

 
6,340

Inventories
2,458

 
2,719

Prepaid rent
2,891

 
2,894

Income tax receivable
—

 
4,974

Prepaid expenses and other current assets
4,576

 
3,166

Deferred income taxes
2,925

 
2,925

Total current assets
25,911

 
28,105

Property and equipment, net
204,882

 
191,371

Goodwill
123,484

 
123,484

Deferred income taxes
11,055

 
11,055

Deferred financing costs, net
1,156

 
1,233

Other assets
3,430

 
2,708

Total assets
$
369,918

 
$
357,956

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Current liabilities:
 
 
 
Current portion of long-term debt
$
42

 
$
61

Accounts payable
11,076

 
10,151

Accrued income taxes
1,446

 
—

Accrued payroll, related taxes and benefits
11,895

 
15,857

Accrued real estate taxes
2,697

 
5,044

Other liabilities
8,469

 
8,310

Total current liabilities
35,625

 
39,423

Long-term debt, net of current portion
71,266

 
67,264

Lease financing obligations
1,661

 
1,660

Deferred income—sale-leaseback of real estate
32,808

 
34,079

Other liabilities
16,641

 
15,943

Total liabilities
158,001

 
158,369

Commitments and contingencies

 

Stockholders' equity:
 
 
 
Common stock, par value $.01; authorized 100,000,000 shares, issued 26,823,067 and 26,782,945 shares, respectively, and outstanding 26,474,687 and 26,358,448 shares, respectively.
265

 
264

Additional paid-in capital
155,695

 
153,867

Retained earnings
55,957

 
45,456

Total stockholders' equity
211,917

 
199,587

Total liabilities and stockholders' equity
$
369,918

 
$
357,956



The accompanying notes are an integral part of these condensed consolidated unaudited financial statements.
3
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FIESTA RESTAURANT GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 29, 2015 AND MARCH 30, 2014
(In thousands of dollars, except share and per share amounts)
(Unaudited)
 
Three Months Ended
 
March 29, 2015
 
March 30, 2014
Revenues:
 
 
 
Restaurant sales
$
163,058

 
$
144,825

Franchise royalty revenues and fees
817

 
611

Total revenues
163,875

 
145,436

Costs and expenses:
 
 
 
Cost of sales
51,123

 
45,529

Restaurant wages and related expenses (including stock-based compensation expense of $67 and $9, respectively)
40,590

 
36,506

Restaurant rent expense
8,007

 
7,204

Other restaurant operating expenses
19,859

 
17,885

Advertising expense
5,554

 
5,419

General and administrative (including stock-based compensation expense of $874 and $712, respectively)
13,764

 
12,151

Depreciation and amortization
6,847

 
5,345

Pre-opening costs
951

 
683

Impairment and other lease charges
94

 
(15
)
Other (income) expense
(372
)
 
(6
)
Total operating expenses
146,417

 
130,701

Income from operations
17,458

 
14,735

Interest expense
438

 
603

Income before income taxes
17,020

 
14,132

Provision for income taxes
6,519

 
5,413

Net income
$
10,501

 
$
8,719

Basic net income per share
$
0.39

 
$
0.33

Diluted net income per share
$
0.39

 
$
0.33

Basic weighted average common shares outstanding
26,435,166

 
26,201,747

Diluted weighted average common shares outstanding
26,442,602

 
26,202,309



The accompanying notes are an integral part of these condensed consolidated unaudited financial statements.
4
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FIESTA RESTAURANT GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 29, 2015 AND MARCH 30, 2014
(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 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

 
 
 
 
 
 
 
 
 
 
 
Balance at December 28, 2014
 
26,358,448

 
$
264

 
$
153,867

 
$
45,456

 
$
199,587

Stock-based compensation
 
—

 
—

 
941

 
—

 
941

Vesting of restricted shares and related tax benefit
 
116,239

 
1

 
887

 
—

 
888

Net income
 
—

 
—

 
—

 
10,501

 
10,501

Balance at March 29, 2015
 
26,474,687

 
$
265

 
$
155,695

 
$
55,957

 
$
211,917



The accompanying notes are an integral part of these condensed consolidated unaudited financial statements.
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FIESTA RESTAURANT GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 29, 2015 AND MARCH 30, 2014
(In thousands of dollars)
(Unaudited)
 
Three Months Ended
 
March 29, 2015
 
March 30, 2014
Cash flows from operating activities:
 
 
 
Net income
$
10,501

 
$
8,719

Adjustments to reconcile net income to net cash provided from operating activities:
 
 
 
Loss (gain) on disposals of property and equipment
(294
)
 
36

Stock-based compensation
941

 
721

Impairment and other lease charges
94

 
(15
)
Depreciation and amortization
6,847

 
5,345

Amortization of deferred financing costs
77

 
77

Amortization of deferred gains from sale-leaseback transactions
(911
)
 
(919
)
Deferred income taxes
—

 
(82
)
Changes in other operating assets and liabilities
(4,434
)
 
(6,985
)
Net cash provided from operating activities
12,821

 
6,897

Cash flows from investing activities:
 
 
 
Capital expenditures:
 
 
 
New restaurant development
(15,955
)
 
(10,869
)
Restaurant remodeling
(872
)
 
(1,929
)
Other restaurant capital expenditures
(1,245
)
 
(1,432
)
Corporate and restaurant information systems
(1,185
)
 
(1,999
)
Total capital expenditures
(19,257
)
 
(16,229
)
Proceeds from sale-leaseback transactions
—

 
5,704

Proceeds from sales of other properties
—

 
1,027

Net cash used in investing activities
(19,257
)
 
(9,498
)
Cash flows from financing activities:
 
 
 
Excess tax benefit from vesting of restricted shares
888

 
1,050

Borrowings on revolving credit facility
7,000

 
8,000

Repayments on revolving credit facility
(3,000
)
 
(15,000
)
Principal payments on capital leases
(16
)
 
(15
)
Other financing costs
—

 
(6
)
Net cash provided by (used in) financing activities
4,872

 
(5,971
)
Net decrease in cash
(1,564
)
 
(8,572
)
Cash, beginning of period
5,087

 
10,978

Cash, end of period
$
3,523

 
$
2,406

Supplemental disclosures:
 
 
 
Interest paid on long-term debt
$
418

 
$
470

Accruals for capital expenditures
$
5,012

 
$
1,933

Income tax payments (refunds), net
$
(789
)
 
$
94


The accompanying notes are an integral part of these condensed consolidated unaudited financial statements.
6
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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 29, 2015, Fiesta owned and operated 130 Pollo Tropical® restaurants, of which 109 were located in Florida, twelve were located in Texas, seven were located in Georgia and two were located in Tennessee and franchised a total of 37 Pollo Tropical restaurants, including 17 in Puerto Rico, five in Panama, two in Guatemala, two in Trinidad & Tobago, two in Venezuela, one in the Bahamas, one in the Dominican Republic, one in Ecuador, one in Honduras and five on college campuses in Florida. At March 29, 2015, Fiesta owned and operated 164 Taco Cabana® restaurants, of which 159 were located in Texas, three were located in Oklahoma and, under the Cabana Grill® logo, which is an elevated, non-24 hour format for Taco Cabana, one was located in Georgia and one was located in Florida, and franchised a total of seven Taco Cabana restaurants, including four in New Mexico, and three non-traditional locations (college campuses) in Texas.
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 28, 2014 contained 52 weeks. The three months ended March 29, 2015 and March 30, 2014 each contained thirteen weeks. The fiscal year ending January 3, 2016 will contain 53 weeks.
Basis of Presentation. The accompanying unaudited condensed consolidated financial statements for the three months ended March 29, 2015 and March 30, 2014 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 29, 2015 and March 30, 2014 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 28, 2014 included in the Company's Annual Report on Form 10-K for the fiscal year ended December 28, 2014. The December 28, 2014 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 senior credit facility, which is considered Level 2, is based on current LIBOR rates and at March 29, 2015, was approximately $70.0 million.
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

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


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. Other Liabilities
Other liabilities, current, consisted of the following:
 
March 29, 2015
 
December 28, 2014
Accrued workers' compensation and general liability claims
$
4,095

 
$
3,996

Sales and property taxes
1,710

 
1,933

Accrued occupancy costs
415

 
508

Other
2,249

 
1,873

 
$
8,469

 
$
8,310

Other liabilities, long-term, consisted of the following:
 
March 29, 2015
 
December 28, 2014
Accrued occupancy costs
$
12,775

 
$
12,254

Deferred compensation
1,410

 
1,102

Accrued workers' compensation and general liability claims
1,075

 
977

Other
1,381

 
1,610

 
$
16,641

 
$
15,943

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 are included in long-term accrued occupancy costs above at March 29, 2015 and December 28, 2014, with the remainder in other current liabilities:
 
Three Months Ended March 29, 2015
 
Year Ended December 28, 2014
Balance, beginning of period
$
1,251

 
$
1,439

       Additional lease charges, net of recoveries
—

 
5

Payments, net
(70
)
 
(321
)
Other adjustments
31

 
128

Balance, end of period
$
1,212

 
$
1,251

3. Stock-Based Compensation
During the three months ended March 29, 2015 and March 30, 2014, the Company granted 22,597 and 71,891 non-vested restricted shares, respectively, 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 these non-vested shares issued to employees during the three months ended March 29, 2015 and March 30, 2014 was $62.05 and $45.04, respectively.
During the three months ended March 29, 2015 and March 30, 2014, the Company granted 10,007 and 24,252 restricted stock units, respectively, 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 stock units vest and become non-forfeitable at the end of a four year vesting period. The weighted average fair value at grant date for these restricted stock units issued to employees during the three months ended March 29, 2015 and March 30, 2014 was $62.05 and $45.04, respectively.

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


Also during the three months ended March 29, 2015, the Company granted in the aggregate 17,501 non-vested restricted shares and 17,501 restricted stock units under the Fiesta Plan to certain employees subject to performance conditions. The non-vested restricted shares vest and become non-forfeitable over a four year vesting period subject to the attainment of performance conditions. The restricted stock units vest and become non-forfeitable at the end of a three year vesting period. The number of shares into which the restricted stock units convert is determined based on the attainment of certain performance conditions, and ranges from no shares if the minimum performance condition is not met to 35,002 shares if the maximum performance condition is met. The weighted average fair value at the grant date for restricted non-vested shares and restricted stock units subject to performance conditions issued during the three months ended March 29, 2015 was $65.01.
Stock-based compensation expense for the three months ended March 29, 2015 and March 30, 2014 was $0.9 million and $0.7 million, respectively. As of March 29, 2015, the total unrecognized stock-based compensation expense relating to non-vested restricted shares and restricted stock units was approximately $9.7 million. At March 29, 2015, the remaining weighted average vesting period for non-vested restricted shares and restricted stock units was 2.1 years.
  A summary of all non-vested restricted shares and restricted stock units activity for the three months ended March 29, 2015 was as follows:
 
Non-Vested Shares
 
Restricted Stock Units
 
 
 
Weighted
 
 
 
Weighted
 
 
 
Average
 
 
 
Average
 
 
 
Grant Date
 
 
 
Grant Date
 
Shares
 
Price
 
Units
 
Price
Outstanding at December 28, 2014
424,497

 
$
20.50

 
20,783

 
$
45.04

Granted
40,098

 
63.34

 
27,508

 
63.93

Vested
(116,123
)
 
18.14

 
(116
)
 
45.04

Forfeited
(92
)
 
13.62

 
(552
)
 
48.92

Outstanding at March 29, 2015
348,380

 
$
26.22

 
47,623

 
$
55.91

The fair value of the non-vested restricted shares and restricted stock units is based on the closing price on the date of grant.
4. 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.

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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, corporate cash accounts, and as of December 28, 2014, a current income tax receivable.
 
Three Months Ended
 
Pollo Tropical
 
Taco Cabana
 
Other
 
Consolidated
March 29, 2015:
 
 
 
 
 
 
 
 
Restaurant sales
 
$
86,889

 
$
76,169

 
$
—

 
$
163,058

Franchise revenue
 
681

 
136

 
—

 
817

Cost of sales
 
28,539

 
22,584

 
—

 
51,123

Restaurant wages and related expenses (1)
 
18,754

 
21,836

 
—

 
40,590

Restaurant rent expense
 
3,649

 
4,358

 
—

 
8,007

Other restaurant operating expenses
 
10,089

 
9,770

 
—

 
19,859

Advertising expense
 
2,358

 
3,196

 
—

 
5,554

General and administrative expense (2)
 
7,797

 
5,967

 
—

 
13,764

Depreciation and amortization
 
3,739

 
3,108

 
—

 
6,847

Pre-opening costs
 
870

 
81

 
—

 
951

Impairment and other lease charges
 
—

 
94

 
—

 
94

Interest expense
 
185

 
253

 
—

 
438

Income before taxes
 
11,590

 
5,430

 
—

 
17,020

Capital expenditures
 
15,042

 
3,051

 
1,164

 
19,257

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

Identifiable Assets:
 
 
 
 
 
 
 
 
March 29, 2015:
 
$
193,935

 
$
170,170

 
$
5,813

 
$
369,918

December 28, 2014
 
177,923

 
167,729

 
12,304

 
357,956


(1) Includes stock-based compensation expense of $67 for the three months ended March 29, 2015, and $9 for the three months ended March 30, 2014.
(2) Includes stock-based compensation expense of $874 for the three months ended March 29, 2015, and $712 for the three months ended March 30, 2014.


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


5. 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. Restricted stock units with performance conditions are only included in the diluted earnings per share calculation to the extent that the performance conditions have been met at the measurement date. 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 is as follows:
 
  
Three Months Ended
 
  
March 29, 2015
 
March 30, 2014
Basic and diluted net income per share:
  
 
 
 
Net income
  
$
10,501

 
$
8,719

Less: income allocated to participating securities
  
(142
)
 
(175
)
Net income available to common stockholders
  
$
10,359

 
$
8,544

Weighted average common shares, basic
 
26,435,166

 
26,201,747

Restricted stock units
 
7,436

 
562

Weighted average common shares, diluted
  
26,442,602

 
26,202,309

 
 
 
 
 
Basic net income per common share
  
$
0.39

 
$
0.33

Diluted net income per common share
 
$
0.39

 
$
0.33

6. Commitments and Contingencies
Legal Matters. The Company is a party to legal proceedings incidental to the conduct of business. The Company records accruals for outstanding legal matters when it believes it is probable that a loss will be incurred and the amount can be reasonably estimated. The Company evaluates, on a quarterly basis, developments in legal matters that could affect the amount of any accrual and developments that would make a loss contingency both probable and reasonably estimable. If a loss contingency is not both probable and estimable, the Company does not establish an accrued liability.
There were no material changes to the status of the class action suit filed by Daisy, Inc., an automotive repair shop in Cape Coral, Florida, against Fiesta Restaurant Group, Inc. during the three months ended March 29, 2015. The amount of any loss related to this matter cannot be reasonably estimated at this time. The Company does not have insurance coverage for this claim.
The Company is a party to various other 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.

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


7. Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), 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 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.
In April 2015, the Financial Accounting Standards Board issued ASU 2015-03, Interest-Imputation of Interest (Subtopic 835-30), Simplifying the Presentation of Debt Issuance Costs, which changes the presentation of debt issuance costs. ASU 2015-03 requires debt issuance costs related to a recognized liability to be reported as a direct reduction from the carrying amount of the debt. The new standard does not change the recognition and measurement of debt issuance costs. The Company will reclassify its debt issuance costs from Other assets to Long-term debt, net of current portion for all periods presented when it adopts the standard. For the Company, the new standard is effective for interim and annual periods beginning after December 15, 2015.



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ITEM 2-MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of financial condition and results of operations ("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. Any reference to restaurants refers to company-owned restaurants unless otherwise indicated.
We use a 52-53 week fiscal year ending on the Sunday closest to December 31. The fiscal year ended December 28, 2014 contained 52 weeks. The three months ended March 29, 2015 and March 30, 2014 each contained thirteen weeks. 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, nearly all of our restaurants offer the convenience of drive-thru windows. As of March 29, 2015, our company-owned restaurants included 130 Pollo Tropical restaurants and 164 Taco Cabana restaurants (including two restaurants under the Cabana Grill® logo, which is an elevated, non-24 hour format for Taco Cabana which we are currently testing outside of Texas).
We franchise our Pollo Tropical restaurants primarily internationally and as of March 29, 2015, we had 37 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 U.S. markets in which we currently operate.
As of March 29, 2015, we had four Taco Cabana franchised restaurants located in New Mexico and three non-traditional Taco Cabana licensed locations in Texas.
Executive Summary-Consolidated Operating Performance for the Three Months Ended March 29, 2015
Our first quarter 2015 results and highlights include the following:
•Net income increased $1.8 million to $10.5 million in the first quarter of 2015, or $0.39 per diluted share, compared to net income of $8.7 million, or $0.33 per diluted share in the first quarter of 2014, primarily due to the net impact of the growth in revenues discussed below.
•Total revenues increased 12.7% in the first quarter of 2015 to $163.9 million compared to $145.4 million in the first quarter of 2014, driven primarily by an increase in the number of our company-owned restaurants and an increase in comparable restaurant sales of 6.4% for our Pollo Tropical restaurants and 3.8% for our Taco Cabana restaurants. The growth in comparable restaurant sales resulted primarily from an increase in average check of 5.5% at Pollo Tropical and 3.1% at Taco Cabana and an increase in transactions of 0.9% at Pollo Tropical and 0.7% at Taco Cabana.
•During the first quarter of 2015, we opened six new company-owned Pollo Tropical restaurants and permanently closed three company-owned Taco Cabana restaurants. During the first quarter of 2014, we opened four new company-owned Pollo Tropical restaurants.
•Adjusted EBITDA increased $4.2 million in the first quarter of 2015 to $25.0 million compared to $20.8 million in the first quarter of 2014, also 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".


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Results of Operations
The following table sets forth, for the three months ended March 29, 2015 and March 30, 2014, 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
 
March 29, 2015
 
March 30, 2014
 
March 29, 2015
 
March 30, 2014
 
March 29, 2015
 
March 30, 2014
 
Pollo Tropical
 
Taco Cabana
 
Consolidated
Restaurant sales:
 
 
 
 
 
 
 
 
 
 
 
Pollo Tropical
 
 
 
 
 
 
 
 
53.3
%
 
49.3
%
Taco Cabana
 
 
 
 
 
 
 
 
46.7
%
 
50.7
%
Consolidated restaurant sales
 
 
 
 
 
 
 
 
100.0
%
 
100.0
%
Costs and expenses:
 
 
 
 
 
 
 
 
 
 
 
Cost of sales
32.8
%
 
32.6
%
 
29.6
%
 
30.4
%
 
31.4
%
 
31.4
%
Restaurant wages and related expenses
21.6
%
 
21.4
%
 
28.7
%
 
28.9
%
 
24.9
%
 
25.2
%
Restaurant rent expense
4.2
%
 
4.1
%
 
5.7
%
 
5.8
%
 
4.9
%
 
5.0
%
Other restaurant operating expenses
11.6
%
 
11.7
%
 
12.8
%
 
12.9
%
 
12.2
%
 
12.3
%
Advertising expense
2.7
%
 
2.7
%
 
4.2
%
 
4.7
%
 
3.4
%
 
3.7
%
Pre-opening costs
1.0
%
 
0.7
%
 
0.1
%
 
0.2
%
 
0.6
%
 
0.5
%
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 28, 2014
124

 
37

 
161

 
167

 
7

 
174

   New
6

 
—

 
6

 
—

 
—

 
—

   Closed
—

 
—

 
—

 
(3
)
 
—

 
(3
)
March 29, 2015
130

 
37

 
167

 
164

 
7

 
171

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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


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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, closures of restaurants and changes in comparable restaurant sales.
Total revenues increased 12.7% to $163.9 million in the first quarter of 2015 from $145.4 million in the first quarter of 2014. Restaurant sales also increased 12.6% to $163.1 million in the first quarter of 2015 from $144.8 million in the first quarter of 2014. 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 2015 compared to the first quarter of 2014 (in millions):
Pollo Tropical:
 
Increase in comparable restaurant sales
$
4.4

Incremental sales related to new restaurants
11.1

   Total increase
$
15.5

 
 
Taco Cabana:
 
Increase in comparable restaurant sales
$
2.7

Incremental sales related to new restaurants, net of closed restaurants
—

   Total increase
$
2.7

Comparable restaurant sales for Pollo Tropical restaurants increased 6.4% in the first quarter of 2015. Comparable restaurant sales for Taco Cabana restaurants increased 3.8% in the first quarter of 2015. Restaurants are included in comparable restaurant sales after they have been open for 18 months. Increases in comparable restaurant sales result primarily 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 5.4% in the first quarter of 2015 as compared to the first quarter of 2014. For Taco Cabana, menu price increases drove an increase in restaurant sales of 1.9% in the first quarter of 2015 as compared to the first quarter of 2014, and the remaining increase in average check was primarily driven by a positive change in sales mix due to the implementation of new menu boards during the first quarter of 2015.
Restaurants in markets that haven't reached media efficiency generally have lower sales than restaurants in existing media-efficient markets.
Franchise revenues increased to $0.8 million in the first quarter of 2015 from $0.6 million in the first quarter of 2014.
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 rebates and 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, general liability insurance, 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.

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Table of Contents

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 2015 compared to the first quarter of 2014. All percentages are stated as a percentage of applicable segment restaurant sales.
Pollo Tropical:
 
Cost of sales:
 
   Higher commodity costs
1.8
 %
   Menu price increases
(1.8
)%
Other
0.2
 %
      Net increase in cost of sales as a percentage of restaurant sales
0.2
 %
 
 
Restaurant wages and related expenses:
 
   Impact of higher sales volumes on fixed labor costs for comparable stores
(1.0
)%
   Higher labor costs and impact of lower sales volumes for new stores
0.8
 %
   Lower medical benefit costs
(0.2
)%
   Higher workers' compensation claim costs
0.4
 %
   Other
0.2
 %
      Net increase in restaurant wages and related costs as a percentage of restaurant sales
0.2
 %
 
 
Other operating expenses:
 
   Lower repairs and maintenance costs
(0.2
)%
   Higher insurance costs
0.1
 %
      Net decrease in other restaurant operating expenses as a percentage of restaurant sales
(0.1
)%
 
 
Advertising expense:
 
      Net change in advertising expense as a percentage of restaurant sales
—
 %
 
 
Pre-opening costs:
 
   Increase in number of restaurants opened
0.3
 %
      Net increase in pre-opening costs as a percentage of restaurant sales
0.3
 %

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Table of Contents

Taco Cabana:
 
Cost of sales:
 
Higher commodity costs
0.5
 %
  Menu price increases
(0.6
)%
  Menu board changes and sales mix
(0.5
)%
   Other
(0.2
)%
      Net decrease in cost of sales as a percentage of restaurant sales
(0.8
)%
 
 
Restaurant wages and related expenses:
 
   Impact of higher sales volumes on fixed labor costs for comparable stores
(0.2
)%
   Lower workers' compensation claim costs
(0.2
)%
   Higher medical costs
0.1
 %
   Other
0.1
 %
      Net decrease in restaurant wages and related costs as a percentage of restaurant sales
(0.2
)%
 
 
Other operating expenses:
 
      Net decrease in other restaurant operating expenses as a percentage of restaurant sales
(0.1
)%
 
 
Advertising expense:
 
  Timing of promotions and impact of higher sales
(0.5
)%
      Net decrease in advertising expense as a percentage of restaurant sales
(0.5
)%
 
 
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
)%
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 4.9% in the first quarter of 2015 from 5.0% the first quarter of 2014 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; and (2) legal, auditing and other professional fees and stock-based compensation expense.
General and administrative expenses were $13.8 million in the first quarter of 2015 and $12.2 million in the first quarter of 2014 and as a percentage of total revenues, general and administrative expenses were 8.4% in both the first quarter of 2015 and the first quarter of 2014. General and administrative expenses increased $1.6 million in the first quarter of 2015 compared to the first quarter of 2014 primarily due to personnel and training to support the ongoing Pollo Tropical expansion into new markets.
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, supply chain, development, 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 the heading entitled "Management's Use of Non-GAAP Financial Measures".
Adjusted EBITDA for Pollo Tropical increased to $16.0 million in the first quarter of 2015 from $13.7 million in the first quarter of 2014 due primarily to the net impact of the increase in revenues, partially offset by an increase in pre-opening costs.

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Table of Contents

Adjusted EBITDA for Taco Cabana increased to $9.0 million in the first quarter of 2015 from $7.1 million in the first quarter of 2014 also primarily due to the net impact of the increase in revenues.
Depreciation and Amortization. Depreciation and amortization expense increased to $6.8 million in the first quarter of 2015 from $5.3 million in the first quarter of 2014 due primarily to increased depreciation relating to new restaurant openings.
Impairment and Other Lease Charges. Impairment and other lease charges were $0.1 million in the first quarter of 2015 and consisted of impairment charges for Taco Cabana locations that have closed or will be closed.
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 and one Taco Cabana restaurant, the projected cash flows were not substantially in excess of their carrying values. 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 first quarter of 2015 primarily consisted of a previously deferred gain from a sale-leaseback transaction that was recognized upon termination of the lease as a result of an eminent domain proceeding.
Interest Expense. Interest expense decreased $0.2 million to $0.4 million in the first quarter of 2015 from $0.6 million in the first quarter 2014 due primarily to lower borrowing rates and higher capitalized interest in 2015.
Provision for Income Taxes. The provision for income taxes was derived using an estimated effective annual income tax rate of 38.3% for the first quarter of 2015 and 2014. There were no discrete tax adjustments in the first quarter of 2015 or 2014.
Net Income. As a result of the foregoing, we had net income of $10.5 million in the first quarter of 2015 compared to net income of $8.7 million in the first quarter of 2014.
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 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 2015 was $12.8 million. Net cash provided by operating activities for the first three months of 2014 was $6.9 million. The increase in net cash provided by operating activities in the first quarter of 2015 was primarily driven by the increase in Adjusted EBITDA and the receipt of a federal tax refund in the first quarter of 2015. 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".
Investing Activities. Net cash used in investing activities in the first three months of 2015 and 2014 was $19.3 million and $9.5 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/reimaging, 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 29, 2015:
 
 
 
 
 
 
 
New restaurant development
$
14,476

 
$
1,479

 
$
—

 
$
15,955

Restaurant remodeling
—

 
872

 
—

 
872

Other restaurant capital expenditures (1)
555

 
690

 
—

 
1,245

Corporate and restaurant information systems
11

 
10

 
1,164

 
1,185

Total capital expenditures
$
15,042

 
$
3,051

 
$
1,164

 
$
19,257

Number of new restaurant openings
6

 
—

 
 
 
6

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

 _____________
1)
Excludes restaurant repair and maintenance expenses included in other restaurant operating expenses in our consolidated financial statements. For the three months ended March 29, 2015 and March 30, 2014, total restaurant repair and maintenance expenses were approximately $3.5 million and $3.1 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.
Financing Activities. Net cash provided by financing activities in the first three months of 2015 was $4.9 million and included net revolving credit borrowings under our senior credit facility of $4.0 million and the excess tax benefit from vesting of restricted shares of $0.9 million. Net cash used in financing activities in the first three months of 2014 was $6.0 million and included net repayments of revolving credit borrowings under our senior credit facility of $7.0 million and the excess tax benefit from vesting of restricted shares of $1.1 million.
Senior Credit Facility. In December 2013, we terminated our former senior credit facility and entered into a new senior credit facility. The 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 senior credit facility also provides for potential incremental increases of up to $50 million to the revolving credit borrowings available under the senior credit facility. On March 29, 2015, there were $70.0 million in outstanding revolving credit borrowings under our senior credit facility.
Borrowings under the senior credit facility bear interest at a per annum rate, at our option, equal to either (all terms as defined in the 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 March 29, 2015), 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 March 29, 2015).
In addition, the 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 0.25% at March 29, 2015) 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 senior credit facility are guaranteed by all of our material domestic subsidiaries. In general, our obligations under our 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 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.

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Table of Contents

The outstanding borrowings under the senior credit facility are prepayable without penalty (other than customary breakage costs). The 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 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 senior credit facility).
Our 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 29, 2015, we were in compliance with the covenants under our senior credit facility. After reserving $6.3 million for letters of credit issued under the senior credit facility, $73.7 million was available for borrowing under the senior credit facility at March 29, 2015.
Off-Balance Sheet Arrangements and Contractual Obligations
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.
There have been no significant changes outside the ordinary course of business to our contractual obligations since December 28, 2014. Information regarding our contractual obligations is included under "Contractual Obligations" in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year ended December 28, 2014.
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.
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 28, 2014 included in our Annual Report on Form 10-K for the fiscal year ended December 28, 2014. 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 29, 2015.
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 us 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, supply chain, development and other administrative functions.

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Management believes that Adjusted EBITDA, 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 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 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 earnings 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
(Dollars in thousands)
March 29, 2015
 
March 30, 2014
Adjusted EBITDA:
 
 
 
Pollo Tropical
$
16,011

 
$
13,677

Taco Cabana
8,957

 
7,103

Consolidated
24,968

 
20,780

Less:
 
 
 
Depreciation and amortization
6,847

 
5,345

Impairment and other lease charges
94

 
(15
)
Interest expense
438

 
603

Provision for income taxes
6,519

 
5,413

Stock-based compensation expense
941

 
721

Other (income) expense
(372
)
 
(6
)
Net income
$
10,501

 
$
8,719

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:

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•
Increases in food and other commodity costs;
•
Risks associated with the expansion of our business;
•
Our ability to manage our growth and successfully implement our business strategy;
•
General economic conditions, particularly in the retail sector;
•
Competitive conditions;
•
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;
•
Regulatory factors;
•
The outcome of pending or future legal claims or proceedings;
•
Environmental conditions and regulations;
•
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; and
•
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.
ITEM 3—QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Commodity Price Risk
We purchase certain products which are affected by commodity prices and are, therefore, subject to price volatility caused by weather, market conditions and other factors which are not considered predictable or within our control. Although many of the products purchased are subject to changes in commodity prices, certain purchasing contracts or pricing arrangements have been negotiated in advance to minimize price volatility. Where possible, we use these types of purchasing techniques to control costs as an alternative to using financial instruments to hedge commodity prices. In many cases, we believe we will be able to address commodity cost increases that are significant and appear to be long-term in nature by adjusting our menu pricing. However, long-term increases in commodity prices may result in lower restaurant-level operating margins.
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 28, 2014 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

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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 29, 2015.
Changes in Internal Control over Financial Reporting. No change occurred in our internal control over financial reporting during the first quarter of 2015 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II—OTHER INFORMATION
Item 1.    Legal Proceedings
There have been no material changes to the legal proceedings previously disclosed in Part 1 - Item 1 our Annual Report on Form 10-K for the fiscal year ended December 28, 2014.
Item 1A.    Risk Factors
Part 1 - Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 28, 2014 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 28, 2014.
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: April 30, 2015
/S/    TIMOTHY P. TAFT        
 
(Signature)
 
Timothy P. Taft
Chief Executive Officer
 
 
Date: April 30, 2015
/S/    LYNN S. SCHWEINFURTH   
 
(Signature)
 
Lynn S. Schweinfurth
Senior Vice President, Chief Financial Officer and Treasurer
 
 
Date: April 30, 2015
/S/    ANGELA J. NEWELL
 
(Signature)
 
Angela J. Newell
Vice President, Corporate Controller


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