FIESTA RESTAURANT GROUP, INC., 10-K filed on 2/26/2018
Annual Report
Document and Entity Information (USD $)
12 Months Ended
Dec. 31, 2017
Feb. 22, 2018
Jul. 2, 2017
Document And Entity Information [Abstract]
 
 
 
Entity Registrant Name
FIESTA RESTAURANT GROUP, INC. 
 
 
Entity Central Index Key
0001534992 
 
 
Current Fiscal Year End Date
--12-31 
 
 
Entity Filer Category
Large Accelerated Filer 
 
 
Document Type
10-K 
 
 
Document Period End Date
Dec. 31, 2017 
 
 
Document Fiscal Year Focus
2017 
 
 
Document Fiscal Period Focus
FY 
 
 
Amendment Flag
false 
 
 
Entity Common Stock, Shares Outstanding
 
27,093,581 
 
Entity Current Reporting Status
Yes 
 
 
Entity Voluntary Filers
No 
 
 
Entity Well-known Seasoned Issuer
Yes 
 
 
Entity Public Float
 
 
$ 522,577,697 
CONSOLIDATED BALANCE SHEETS (USD $)
In Thousands, unless otherwise specified
Dec. 31, 2017
Jan. 1, 2017
Current assets:
 
 
Cash
$ 3,599 
$ 4,196 
Trade receivables
9,830 
8,771 
Inventories
2,880 
2,865 
Prepaid rent
3,300 
3,575 
Income tax receivable
11,334 
3,304 
Prepaid expenses and other current assets
10,105 
4,231 
Total current assets
41,048 
26,942 
Property and equipment, net
234,561 
270,920 
Goodwill
123,484 
123,484 
Deferred income taxes
17,232 
14,377 
Other assets
6,988 
5,842 
Total assets
423,313 
441,565 
Current liabilities:
 
 
Current portion of long-term debt
98 
89 
Accounts payable
20,293 
16,165 
Accrued payroll, related taxes and benefits
11,776 
12,275 
Accrued real estate taxes
5,860 
6,924 
Other liabilities
21,817 
11,316 
Total current liabilities
59,844 
46,769 
Long-term debt, net of current portion
76,425 
71,423 
Deferred income—sale-leaseback of real estate
23,466 
27,165 
Other liabilities
32,062 
32,033 
Total liabilities
191,797 
177,390 
Commitments and contingencies
   
   
Stockholders' equity:
 
 
Common stock, par value $.01; authorized 100,000,000 shares, issued 27,086,958 and 26,884,992 shares, respectively, and outstanding 26,847,458 and 26,755,640 shares, respectively.
268 
267 
Additional paid-in capital
166,823 
163,204 
Retained earnings
64,425 
100,704 
Total stockholders' equity
231,516 
264,175 
Total liabilities and stockholders' equity
$ 423,313 
$ 441,565 
CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $)
Dec. 31, 2017
Jan. 1, 2017
Statement of Financial Position [Abstract]
 
 
Common stock, par value (usd per share)
$ 0.01 
$ 0.01 
Common stock, shares authorized
100,000,000 
100,000,000 
Common stock, shares issued
27,086,958 
26,884,992 
Common stock, shares outstanding
26,847,458 
26,755,640 
CONSOLIDATED STATEMENTS OF OPERATIONS (USD $)
In Thousands, except Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2017
Jan. 1, 2017
Jan. 3, 2016
Revenues:
 
 
 
Restaurant sales
$ 666,584 
$ 708,956 
$ 684,584 
Franchise royalty revenues and fees
2,548 
2,814 
2,808 
Total revenues
669,132 
711,770 
687,392 
Costs and expenses:
 
 
 
Cost of sales
202,888 
214,609 
217,328 
Restaurant wages and related expenses (including stock-based compensation expense of $52, $142 and $156, respectively)
184,742 
185,305 
174,222 
Restaurant rent expense
36,936 
37,493 
33,103 
Other restaurant operating expenses
98,927 
96,457 
87,285 
Advertising expense
26,091 
26,800 
21,617 
General and administrative (including stock-based compensation expense of $3,493, $3,141, and $4,137, respectively)
60,144 
56,084 
54,521 
Depreciation and amortization
34,957 
36,776 
30,575 
Pre-opening costs
2,118 
5,511 
4,567 
Impairment and other lease charges
61,760 
25,644 
2,382 
Other expense (income), net
1,679 
(128)
(679)
Total operating expenses
710,242 
684,551 
624,921 
Income (loss) from operations
(41,110)
27,219 
62,471 
Interest expense
2,877 
2,171 
1,889 
Income (loss) before income taxes
(43,987)
25,048 
60,582 
Provision for (benefit from) income taxes
(7,755)
8,336 
22,046 
Net income (loss)
$ (36,232)
$ 16,712 
$ 38,536 
Basic net income (loss) per share (usd per share)
$ (1.35)
$ 0.62 
$ 1.44 
Diluted net income (loss) per share (usd per share)
$ (1.35)
$ 0.62 
$ 1.44 
Basic weighted average common shares outstanding
26,821,471 
26,682,227 
26,515,029 
Diluted weighted average common shares outstanding
26,821,471 
26,689,179 
26,522,196 
CONSOLIDATED STATEMENTS OF OPERATIONS (Parenthetical) (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2017
Jan. 1, 2017
Jan. 3, 2016
Stock-based compensation
$ 3,500 
$ 3,300 
$ 4,300 
Restaurant Wages And Related Expenses
 
 
 
Stock-based compensation
52 
142 
156 
General and Administrative Expense
 
 
 
Stock-based compensation
$ 3,493 
$ 3,141 
$ 4,137 
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (USD $)
In Thousands, except Share data, unless otherwise specified
Total
Common Stock
Additional Paid-In Capital
Retained Earnings
Beginning balance at Dec. 28, 2014
$ 199,587 
$ 264 
$ 153,867 
$ 45,456 
Beginning balance (in shares) at Dec. 28, 2014
26,358,448 
 
 
 
Increase (Decrease) in Stockholders' Equity
 
 
 
 
Stock-based compensation
4,293 
 
4,293 
 
Vesting of restricted shares (in shares)
213,154 
 
 
 
Vesting of restricted shares
(2)
 
Tax benefit from stock-based compensation
1,566 
 
1,566 
 
Net income (loss)
38,536 
 
 
38,536 
Ending balance at Jan. 03, 2016
243,982 
266 
159,724 
83,992 
Ending balance (in shares) at Jan. 03, 2016
26,571,602 
 
 
 
Increase (Decrease) in Stockholders' Equity
 
 
 
 
Stock-based compensation
3,283 
 
3,283 
 
Vesting of restricted shares (in shares)
184,038 
 
 
 
Vesting of restricted shares
(1)
 
Tax benefit from stock-based compensation
198 
 
198 
 
Net income (loss)
16,712 
 
 
16,712 
Ending balance at Jan. 01, 2017
264,175 
267 
163,204 
100,704 
Ending balance (in shares) at Jan. 01, 2017
26,755,640 
 
 
 
Increase (Decrease) in Stockholders' Equity
 
 
 
 
Stock-based compensation
3,545 
 
3,545 
 
Vesting of restricted shares (in shares)
91,818 
 
 
 
Vesting of restricted shares
 
Cumulative effect of adopting a new accounting standard (Note 1)
27 
 
74 
(47)
Net income (loss)
(36,232)
 
 
(36,232)
Ending balance at Dec. 31, 2017
$ 231,516 
$ 268 
$ 166,823 
$ 64,425 
Ending balance (in shares) at Dec. 31, 2017
26,847,458 
 
 
 
CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2017
Jan. 1, 2017
Jan. 3, 2016
Cash flows from operating activities:
 
 
 
Net income (loss)
$ (36,232)
$ 16,712 
$ 38,536 
Adjustments to reconcile net income to net cash provided from operating activities:
 
 
 
Loss (gain) on disposals of property and equipment
815 
779 
(170)
Stock-based compensation
3,545 
3,283 
4,293 
Impairment and other lease charges
61,760 
25,644 
2,382 
Depreciation and amortization
34,957 
36,776 
30,575 
Amortization of deferred financing costs
352 
309 
315 
Amortization of deferred gains from sale-leaseback transactions
(3,602)
(3,600)
(3,600)
Deferred income taxes
(2,828)
(5,880)
5,483 
Other
Changes in other operating assets and liabilities:
 
 
 
Accounts receivable
(1,171)
446 
(2,877)
Prepaid expenses and other current assets
(2,015)
(412)
(53)
Other assets - long term
(552)
(2,796)
(48)
Accounts payable
1,046 
3,330 
283 
Accrued payroll, related taxes and benefits
(499)
(3,339)
(243)
Accrued real estate taxes
(311)
803 
1,077 
Other liabilities - current
(590)
(780)
3,325 
Other liabilities - long term
3,887 
6,498 
4,752 
Income tax receivable/payable
(8,030)
4,144 
(2,474)
Other
288 
(1,256)
(190)
Net cash provided from operating activities
50,820 
80,679 
81,352 
Capital expenditures:
 
 
 
New restaurant development
(26,727)
(66,116)
(70,841)
Restaurant remodeling
(3,020)
(2,755)
(4,802)
Other restaurant capital expenditures
(17,410)
(7,125)
(7,714)
Corporate and restaurant information systems
(8,709)
(6,369)
(4,213)
Total capital expenditures
(55,866)
(82,365)
(87,570)
Properties purchased for sale-leaseback
(2,663)
(250)
Proceeds from disposals of other properties
374 
226 
149 
Proceeds from sale-leaseback transactions
3,642 
Net cash used in investing activities
(55,492)
(81,160)
(87,671)
Cash flows from financing activities:
 
 
 
Excess tax benefit from vesting of restricted shares
566 
1,566 
Borrowings on revolving credit facility
91,000 
18,400 
28,500 
Repayments on revolving credit facility
(85,900)
(19,500)
(23,500)
Principal payments on capital leases
(88)
(70)
(53)
Financing costs associated with issuance of debt
(937)
Net cash provided from (used in) financing activities
4,075 
(604)
6,513 
Net (decrease) increase in cash
(597)
(1,085)
194 
Cash, beginning of year
4,196 
5,281 
5,087 
Cash, end of year
3,599 
4,196 
5,281 
Supplemental disclosures:
 
 
 
Interest paid on long-term debt (including capitalized interest of $256 in 2017, $255 in 2016 and $335 in 2015)
2,363 
1,867 
1,748 
Interest paid on lease financing obligations
83 
141 
140 
Accruals for capital expenditures
8,409 
5,288 
4,858 
Income tax payments, net
3,103 
9,873 
17,472 
Capital lease obligations incurred
410 
Non-cash reduction of lease financing obligations
1,664 
Non-cash reduction of assets under lease financing obligations
$ 1,193 
$ 0 
$ 0 
CONSOLIDATED STATEMENTS OF CASH FLOWS (Parenthetical) (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2017
Jan. 1, 2017
Jan. 3, 2016
Statement of Cash Flows [Abstract]
 
 
 
Capitalized interest
$ 256 
$ 255 
$ 335 
Basis of Presentation
Basis of Presentation
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 December 31, 2017, the Company owned and operated 146 Pollo Tropical® restaurants and 166 Taco Cabana® restaurants. The Pollo Tropical restaurants include 137 located in Florida and 9 located in Georgia. All of the Taco Cabana restaurants are located in Texas. At December 31, 2017, Fiesta franchised a total of 31 Pollo Tropical restaurants and seven Taco Cabana restaurants. The franchised Pollo Tropical restaurants include 17 in Puerto Rico, four in Panama, two in Guyana, one in the Bahamas, one in Venezuela, and six on college campuses and at a hospital in Florida. The franchised Taco Cabana restaurants include five in New Mexico and two on college campuses in Texas.
Basis of Consolidation. The consolidated financial statements presented herein reflect the consolidated financial position, results of operations and cash flows of Fiesta and its wholly-owned subsidiaries. All intercompany transactions have been eliminated in consolidation.
Fiscal Year. The Company uses a 52-53 week fiscal year ending on the Sunday closest to December 31. The fiscal years ended December 31, 2017 and January 1, 2017 each contained 52 weeks. The fiscal year ended January 3, 2016 contained 53 weeks.
Use of Estimates. The preparation of the consolidated financial statements in conformity with U.S. Generally Accepted Accounting Principles ("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.
Reclassification. Lease financing obligations were reclassified to other liabilities - long term to conform with the current year presentation. In addition, prepaid expenses and other current assets were reclassified to a separate line from other in the consolidated statements of cash flows to conform with the current year presentation.
Cash and Cash Equivalents. The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents.
Inventories. Inventories, primarily consisting of food and paper, are stated at the lower of cost (first-in, first-out) or market.
Property and Equipment. The Company capitalizes all direct costs incurred to construct and substantially improve its restaurants. These costs are depreciated and charged to expense based upon their property classification when placed in service. Property and equipment is recorded at cost. Application development stage costs for significant internally developed software projects are capitalized and amortized. Repairs and maintenance activities are expensed as incurred. Depreciation and amortization is provided using the straight-line method over the following estimated useful lives:
Buildings and improvements
5
to
30 years
Equipment
3
to
7 years
Computer hardware and software
3
to
7 years
Assets subject to capital lease
Shorter of useful life or lease term

Leasehold improvements, including new buildings constructed on leased land, are depreciated over the shorter of their estimated useful lives or the underlying lease term. In circumstances where an economic penalty would be presumed by the non-exercise of one or more renewal options under the lease, the Company includes those renewal option periods when determining the lease term. For significant leasehold improvements made during the latter part of the lease term, the Company amortizes those improvements over the shorter of their useful life or an extended lease term. The extended lease term would consider the exercise of renewal options if the value of the improvements would imply that an economic penalty would be incurred without the renewal of the option. Building costs incurred for new restaurants on leased land are depreciated over the lease term, which is generally a twenty-year period.
Goodwill. Goodwill represents the excess purchase price and related costs over the value assigned to the net tangible and identifiable intangible assets acquired by Carrols Restaurant Group, Inc. ("Carrols"), Fiesta's former parent company, from the
acquisition of Pollo Tropical in 1998 and Taco Cabana in 2000. Goodwill is not amortized but is tested for impairment at least annually as of the last day of the fiscal year or more frequently if impairment indicators exist.
Long-Lived Assets. The Company assesses the recoverability of property and equipment and definite-lived intangible assets by determining whether the carrying value of these assets can be recovered over their respective remaining lives through undiscounted future operating cash flows. Impairment is reviewed whenever events or changes in circumstances indicate that the carrying amounts of these assets may not be fully recoverable. See Note 5 for results of the Company's impairment review.
Deferred Financing Costs. Financing costs incurred in obtaining revolving credit facilities are capitalized and amortized over the life of the related obligation as interest expense on a straight-line basis.
Leases.  All leases are reviewed for capital or operating classification at their inception. The majority of the Company's leases are operating leases. Many of the lease agreements contain rent holidays, rent escalation clauses and/or contingent rent provisions. Rent expense for leases that contain scheduled rent increases or rent holidays is recognized on a straight-line basis over the lease term, including any option periods included in the determination of the lease term. Contingent rentals are generally based upon a percentage of sales or a percentage of sales in excess of stipulated amounts and are not considered minimum rent payments but are recognized as rent expense when incurred.
Revenue Recognition. Revenues from the Company's owned and operated restaurants are recognized when payment is tendered at the time of sale. Franchise royalty revenues are based on a percent of gross sales and are recorded as income when earned. Franchise fees, which are associated with opening new franchised restaurants, are recognized as income when all required activities have been performed by the Company. Area development fees, which are associated with opening new franchised restaurants in a given market, are recognized as income over the term of the related agreement.
Income Taxes. Deferred income tax assets and liabilities are based on the difference between the financial statement and tax bases of assets and liabilities as measured by the tax rates that are anticipated to be in effect when those differences reverse. The deferred tax provision generally represents the net change in deferred tax assets and liabilities during the period. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date. A valuation allowance is established when it is necessary to reduce deferred tax assets to amounts for which realization is more likely than not. The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position.
Advertising Costs. All advertising costs are expensed as incurred.
Cost of Sales. The Company includes the cost of food, beverage and paper, net of any discounts, in cost of sales.
Pre-opening Costs. The Company's pre-opening costs are generally incurred beginning four to six months prior to a restaurant opening and generally include 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.
Insurance.  The Company is insured for workers' compensation, general liability and medical insurance claims under policies where it pays all claims, subject to stop-loss limitations both for individual claims and for general liability and certain workers' compensation claims in the aggregate. Losses are accrued based upon estimates of the aggregate liability for claims based on the Company's experience and certain actuarial methods used to measure such estimates. The Company does not discount any of its self-insurance obligations.
 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 under current market conditions. 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 the Company's senior credit facility, which is considered Level 2, is based on current LIBOR rates. At December 31, 2017 and January 1, 2017, the fair value and carrying value of the Company's senior credit facility were approximately $75.0 million and $69.9 million, respectively.
See Note 5 for discussion of the fair value measurement of non-financial assets.
Gift cards. The Company sells gift cards to its customers in its restaurants and through select third parties. The Company recognizes revenue from gift cards upon redemption by the customer. The gift cards have no stated expiration dates. Revenues from unredeemed gift cards are not material to the Company's financial statements.
Recent Accounting Pronouncements. In May 2014, and in subsequent updates, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers (Topic 606), which amends the guidance in former Topic 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 non-financial assets, such as property and equipment, including real estate. The Company does not believe the standard will impact its recognition of revenue from restaurants or its recognition of franchise royalty revenues, which are based on a percent of gross sales. The Company expects the provisions to primarily impact franchise and development fees and gift card programs and does not expect the standard to have a material effect on its financial statements. The Company plans to use the modified retrospective approach to adopt the standard and expects to recognize a cumulative effect adjustment to increase retained earnings by less than $0.1 million related to franchise and development fees and gift card breakage. The new standard is effective for the Company's interim and annual periods beginning after December 15, 2017.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which requires lessee recognition of lease assets and lease liabilities on the balance sheet and disclosure of key information about leasing arrangements. For the Company, the new standard is effective for interim and annual periods beginning after December 15, 2018, and early adoption is permitted. A modified retrospective approach is required with an option to use certain practical expedients. The new guidance is required to be applied at the beginning of the earliest comparative period presented. The Company is currently evaluating the impact on its financial statements. Although the impact is not currently estimable, the Company expects to recognize lease assets and lease liabilities for most of the leases it currently accounts for as operating leases. In addition, for the Company's leases that are classified as sale-leaseback transactions, the Company will be required to record an initial adjustment to retained earnings associated with the previously deferred gains, and for any future transactions, the gain, adjusted for any off-market terms, will be recorded immediately. Currently the Company amortizes sale-leaseback gains over the lease term. The Company is continuing its assessment and may identify other impacts.
In January 2017, the FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment, which eliminates the requirement to calculate the implied fair value of goodwill if the fair value of a reporting unit is less than the carrying amount of the reporting unit. Instead, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss will be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. The guidance will be effective for interim and annual periods beginning after December 15, 2019. Early adoption is permitted for any goodwill impairment tests after January 1, 2017. This standard may have an impact on the Company's financial statements if goodwill impairment is recognized in future periods.
Guidance Adopted in 2017. In March 2016, the Financial Accounting Standards Board issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting (Topic 718), to simplify various aspects of the accounting and presentation of share-based payments, including the income tax effects of awards and forfeiture assumptions. In the first quarter of 2017, the Company prospectively adopted the amendments in this guidance that relate to the classification of excess tax benefits or tax benefit deficiencies from share-based payment arrangements in the statement of cash flows and income statement. Excess tax benefits from share-based payment arrangements result from share-based compensation windfall deductions in excess of compensation costs for financial reporting purposes and tax benefit deficiencies result from share-based compensation deduction shortfalls. During the twelve months ended December 31, 2017, the Company recognized $0.2 million of tax benefit deficiencies, which pursuant to the adopted guidance increased income tax expense and decreased net income by $0.2 million. Effective January 2, 2017, the Company elected to change its accounting policy to recognize forfeitures as they occur. The new forfeiture policy election was adopted using a modified retrospective approach with a $0.1 million cumulative-effect adjustment to beginning retained earnings in the first quarter of 2017 as a result of adopting the standard.
Level 1
Prepaid Expenses and Other Current Assets
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets, consist of the following:
 
December 31, 2017
 
January 1, 2017
Prepaid contract expenses
$
3,681

 
$
2,089

Assets held for sale(1)
2,705

 

Other
3,719

 
2,142

 
$
10,105

 
$
4,231

(1) See Note 5 -- Impairment of Long-lived Assets.
Property and Equipment
Property and Equipment
Property and Equipment
Property and equipment consisted of the following:
 
December 31, 2017
 
January 1, 2017
Land and land improvements
$
20,502

 
$
23,395

Owned buildings
17,221

 
22,008

Leasehold improvements (1)
208,499

 
249,507

Equipment
206,436

 
220,397

Assets subject to capital leases
2,057

 
2,057

 
454,715

 
517,364

Less accumulated depreciation and amortization
(220,154
)
 
(246,444
)
 
$
234,561

 
$
270,920


(1) Leasehold improvements include the cost of new buildings constructed on leased land.
Assets subject to capital leases primarily pertain to buildings leased for certain restaurant locations and had accumulated amortization at December 31, 2017 and January 1, 2017 of $1.1 million and $1.0 million, respectively. At January 1, 2017, land of $0.7 million and owned buildings of $0.8 million were subject to lease financing obligations accounted for under the lease financing method. Accumulated depreciation pertaining to owned buildings subject to lease financing obligations at January 1, 2017 was $0.4 million.
Depreciation and amortization expense for all property and equipment for the years ended December 31, 2017, January 1, 2017 and January 3, 2016 was $35.0 million, $36.8 million and $30.6 million, respectively.
Goodwill
Goodwill
Goodwill
The Company is required to review goodwill for impairment annually or more frequently when events and circumstances indicate that the carrying amount may be impaired. If the determined fair value of goodwill is less than the related carrying amount, an impairment loss is recognized. The Company performs its annual impairment assessment as of the last day of the fiscal year and has determined its reporting units to be its operating segments, Pollo Tropical and Taco Cabana.
In performing its goodwill impairment test, the Company compared the net book values of its reporting units to their estimated fair values, the latter determined by employing a discounted cash flow analysis, which was corroborated with other value indicators where available, such as comparable company earnings multiples.
There have been no changes in goodwill or goodwill impairment losses recorded during the year ended December 31, 2017 or the years ended January 1, 2017 and January 3, 2016.
Goodwill balances are summarized below: 
 
Pollo
Tropical
 
Taco
Cabana
 
Total
Balance, December 31, 2017 and January 1, 2017
$
56,307

 
$
67,177

 
$
123,484

Impairment of Long-Lived Assets and Other Lease Charges
Impairment of Long-Lived Assets and Other Lease Charges
Impairment of Long-Lived Assets and Other Lease Charges
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. There is uncertainty in the projected undiscounted future cash flows used in the Company's impairment review analysis. If actual performance does not achieve the projections, the Company may recognize impairment charges in future periods, and such charges could be material. 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. There is uncertainty in the estimates of future lease costs and sublease recoveries. Actual costs and sublease recoveries could vary significantly from the estimated amounts and result in additional lease charges for recoveries, and such amounts could be material.
A summary of impairment on long-lived assets and other lease charges recorded by segment is as follows:
 
Year Ended
 
December 31, 2017
 
January 1, 2017
 
January 3, 2016
Pollo Tropical
$
57,947

 
$
24,419

 
$
510

Taco Cabana
3,813

 
1,225

 
1,872

 
$
61,760

 
$
25,644

 
$
2,382


    In 2016, the Company reviewed it strategy for development and decided to suspend additional development of Pollo Tropical restaurants outside of its core Florida markets. The Company closed ten Pollo Tropical restaurants in the fourth quarter of 2016 including eight restaurants in Texas, one restaurant in Nashville, Tennessee and one restaurant in Atlanta, Georgia.
On April 24, 2017, the Company announced a Strategic Renewal Plan (the "Plan") to drive long-term shareholder value creation that included the closure of 30 Pollo Tropical restaurants outside its core Florida markets. The Company closed all Pollo Tropical locations in Dallas-Fort Worth and Austin, Texas, and Nashville, Tennessee during the second quarter of 2017. In September 2017, due to the ongoing uncertainty created in south Texas by Hurricane Harvey, limited awareness of the Pollo Tropical brand and overhead costs needed to operate the small remaining Pollo Tropical restaurant base in Texas, the Company closed the six remaining Pollo Tropical restaurants in south Texas including two restaurants in Houston, Texas that were not re-opened after Hurricane Harvey and four restaurants in San Antonio, Texas. In December 2017, the Company closed four additional underperforming Pollo Tropical restaurants in Atlanta, Georgia. One Pollo Tropical restaurant closed in 2016 was rebranded as Taco Cabana restaurant in 2017. Up to five Pollo Tropical restaurants that were closed in 2016 and 2017 in Texas may be rebranded as Taco Cabana restaurants in 2018. The Company continues to own and operate nine Pollo Tropical restaurants in Atlanta, Georgia, of which one was impaired in 2017. The Company also closed six Taco Cabana restaurants in 2017.
Impairment and other lease charges for the twelve months ended December 31, 2017 consisted of impairment charges for Pollo Tropical and Taco Cabana restaurants and an office location of $52.1 million, $1.9 million and $0.2 million, respectively and lease and other charges for Pollo Tropical and Taco Cabana restaurants and an office location of $5.4 million, $1.6 million and $0.5 million, respectively, net of recoveries. Impairment charges in 2017 were related primarily to 40 Pollo Tropical restaurants that were closed in 2017, seven of which were initially impaired in 2016, six Taco Cabana restaurants that were closed in 2017, four of which were initially impaired in 2016, and two Pollo Tropical restaurants and five Taco Cabana restaurants the Company continues to operate. Impairment charges in 2017 also included charges with respect to an office location that was closed in December 2017. Other lease charges, net of recoveries, in 2017 were related primarily to restaurants and an office location that were closed in 2017 as well as previously closed restaurants.
Impairment and other lease charges for the twelve months ended January 1, 2017 consisted of impairment charges for Pollo Tropical and Taco Cabana restaurants of $21.6 million and $1.1 million, respectively, and lease and other charges for Pollo Tropical and Taco Cabana restaurants of $2.8 million and $0.2 million, respectively, net of recoveries. Impairment charges in 2016 were related primarily to 17 Pollo Tropical restaurants that were closed in 2016 and 2017, and seven Taco Cabana restaurants, four of
which were subsequently closed in 2017 and three of which the Company continues to operate. Other lease charges, net of recoveries, for the twelve months ended January 1, 2017 were related to restaurants closed in 2016 as well as previously closed restaurants.
Impairment and other lease charges in 2015 consisted primarily of impairment charges totaling $1.7 million and a $0.2 million lease charge related to the closure of a Taco Cabana restaurant at the end of 2015, a $0.3 million lease charge related to the closure of a Pollo Tropical restaurant that was relocated prior to the end of its lease term to a superior site in the same trade area, and lease charges, net of recoveries, totaling $0.2 million related to previously closed Pollo Tropical restaurants.
The Company determined the fair value of restaurant equipment, for those restaurants reviewed for impairment, based on current economic conditions, the Company’s history of using these assets in the operation of its business and the Company's expectation of how a market participant would value the assets. In addition, for those restaurants reviewed for impairment where the Company owns the land and building, the Company utilized third-party information such as a broker quoted value to determine the fair value of the property. The Company also utilized discounted future cash flows to determine the fair value of assets for certain leased restaurants with positive discounted projected future cash flows. These fair value asset measurements rely on significant unobservable inputs and are considered Level 3 in the fair value hierarchy. The Level 3 assets measured at fair value associated with impairment charges recorded during the twelve months ended December 31, 2017 and January 1, 2017 totaled $13.8 million and $6.9 million, respectively, which primarily consist of leasehold improvements related to Pollo Tropical restaurants that may be rebranded as Taco Cabana restaurants and the estimated fair value of owned properties.
The Company owns four of the Pollo Tropical restaurants that were closed in the second and third quarters of 2017. Two of these properties are available for sale and the Company intends to lease the other two properties. Two of these restaurants with a total carrying value of $2.7 million at December 31, 2017 are classified as held for sale. The Company subsequently sold one of owned properties held for sale in January 2018.
Other Liabilities
Other Liabilities
Other Liabilities
Other liabilities, current, consist of the following:
 
December 31, 2017
 
January 1, 2017
Accrued workers' compensation and general liability claims
$
5,083

 
$
4,838

Sales and property taxes
2,279

 
1,844

Accrued occupancy costs
7,813

 
2,161

Other
6,642

 
2,473

 
$
21,817

 
$
11,316


Other liabilities, long-term, consist of the following:
 
December 31, 2017
 
January 1, 2017
Accrued occupancy costs
$
20,985

 
$
20,172

Deferred compensation
1,029

 
2,027

Accrued workers’ compensation and general liability claims
6,102

 
4,030

Other
3,946

 
5,804

 
$
32,062

 
$
32,033


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 $5.3 million and $3.1 million are included in long-term accrued occupancy costs at December 31, 2017 and January 1, 2017, respectively, with the remainder in other current liabilities.
 
Year Ended
 
December 31, 2017
 
January 1, 2017
Balance, beginning of period
$
4,912

 
$
1,832

Provisions for restaurant closures
8,767

 
3,093

Additional lease charges, net of (recoveries)
(1,301
)
 
(237
)
Payments, net
(5,528
)
 
(806
)
Other adjustments
6,144

 
1,030

Balance, end of period
$
12,994

 
$
4,912

Leases
Leases
Leases
The Company utilizes land and buildings in its operations under various lease agreements. The Company does not consider any one of these individual leases material to the Company's operations. Initial lease terms are generally for twenty years and, in many cases, provide for renewal options and in most cases rent escalations. Certain leases require contingent rent, determined as a percentage of sales as defined by the terms of the applicable lease agreement. For most locations, the Company is obligated for occupancy related costs including payment of property taxes, insurance and utilities.
During the year ended January 1, 2017, the Company sold one restaurant property in a sale-leaseback transaction for net proceeds of $3.6 million. The lease was classified as an operating lease and contained a twenty-year initial term plus renewal options. A deferred gain on the sale-leaseback transaction of $0.7 million was recognized during the year ended January 1, 2017 and is being amortized over the term of the lease.
The amortization of deferred gains on sale-leaseback transactions was $3.6 million for each of the years ended December 31, 2017, January 1, 2017 and January 3, 2016.

Minimum rent commitments due under capital and non-cancelable operating leases at December 31, 2017 were as follows:
 
Capital
 
Operating
2018
$
282

 
$
43,391

2019
282

 
43,142

2020
286

 
41,770

2021
301

 
38,867

2022
301

 
37,664

Thereafter
1,239

 
294,275

Total minimum lease payments(1)
2,691

 
$
499,109

Less amount representing interest
(1,168
)
 
 
Total obligations under capital leases
1,523

 
 
Less current portion
(98
)
 
 
Long-term debt under capital leases
$
1,425

 
 
(1)Minimum operating lease payments include contractual rent payments for closed restaurants for which the Company is still obligated under the lease agreements and have not been reduced by minimum sublease rentals of $17.9 million due in the future under noncancelable subleases. See Note 6 -- Other Liabilities.



Total rent expense on operating leases, including contingent rentals, was as follows:
 
Year Ended
 
December 31, 2017
 
January 1, 2017
 
January 3, 2016
Minimum rent on real property, excluding rent included in pre-opening costs
$
36,760

 
$
37,180

 
$
32,716

Additional rent based on percentage of sales
176

 
313

 
387

Restaurant rent expense
36,936

 
37,493

 
33,103

Rent included in pre-opening costs
856

 
2,066

 
1,736

Administrative and equipment rent
988

 
1,119

 
1,026

 
$
38,780

 
$
40,678

 
$
35,865

Long-term Debt
Long-term Debt
Long-term Debt
Long term debt at December 31, 2017 and January 1, 2017 consisted of the following:
 
December 31, 2017
 
January 1, 2017
Revolving credit facility
$
75,000

 
$
69,900

Capital leases
1,523

 
1,612

 
76,523

 
71,512

Less: current portion of long-term debt
(98
)
 
(89
)
 
$
76,425

 
$
71,423


New Senior Credit Facility. In November 2017, 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 is referred 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 November 30, 2022. 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 December 31, 2017, there were $75.0 million in outstanding borrowings under the new senior credit facility.
Borrowings under the new senior credit facility bear interest at a per annum rate, at the Company's option, equal to either (all terms as defined in the new senior credit facility):
1) the Alternate Base Rate plus the applicable margin of 0.75% to 1.50% based on the Company's Adjusted Leverage Ratio (with a margin of 1.25% as of December 31, 2017), or
2) the LIBOR Rate plus the applicable margin of 1.75% to 2.50% based on the Company's Adjusted Leverage Ratio (with a margin of 2.25% at December 31, 2017)
In addition, the new senior credit facility requires the Company to pay (i) a commitment fee based on the applicable Commitment Fee rate of 0.25% to 0.35%, based on the Company's Adjusted Leverage Ratio, (with a rate of 0.30% at December 31, 2017) and the unused portion of the facility and (ii) a letter of credit participation 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 outstanding borrowings under the Company's new senior credit facility are prepayable subject to breakage costs as defined in the new senior credit facility. The new senior credit facility requires the Company to comply with customary affirmative, negative and financial covenants, including, without limitation, those limiting the Company's and its 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 its business. In addition, the new senior credit facility requires the Company to maintain certain financial ratios, including minimum Fixed Charge Coverage and maximum Adjusted Leverage Ratios (all as defined under the new senior credit facility).
The Company's new senior credit facility contains customary default provisions, including without limitation, a cross default provision pursuant to which it is an event of default under this facility if there is a default under any of the Company's indebtedness having an outstanding principal amount of $5 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 December 31, 2017, the Company was in compliance with the covenants under its new senior credit facility. After reserving $4.9 million for letters of credit, $70.1 million was available for borrowing under the new senior credit facility at December 31, 2017.
Former Senior Credit Facility. The former senior credit facility was entered into in December 2013, provided for aggregate revolving credit borrowings of up to $150 million (including $15 million available for letters of credit) and was scheduled to mature on December 11, 2018. The former senior credit facility also provided for potential incremental increases of up to $50 million to the revolving credit borrowings available under the senior credit facility. The former senior secured revolving credit facility was terminated on November 30, 2017 and replaced with the new senior credit facility discussed above.
Borrowings under the former senior credit facility bore interest at a per annum rate, at the Company's option, equal to either (all terms as defined in the former senior credit facility):
1) the Alternate Base Rate plus the applicable margin of 0.50% to 1.50% based on the Company's Adjusted Leverage Ratio, or
2) the LIBOR Rate plus the applicable margin of 1.50% to 2.50% based on the Company's Adjusted Leverage Ratio.
In addition, the former senior credit facility required the Company to pay (i) a commitment fee based on the applicable Commitment Fee margin of 0.25% to 0.45%, based on the Company's Adjusted Leverage Ratio 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.
At December 31, 2017, principal payments required on borrowings under the new senior credit facility were $75.0 million in 2022. The weighted average interest rate on the borrowings under the new senior credit facility and former senior credit facility was 3.73% and 2.29% at December 31, 2017 and January 1, 2017, respectively. Interest expense on the Company's long-term debt, excluding lease financing obligations, was $2.7 million, $1.9 million and $1.6 million for the years ended December 31, 2017, January 1, 2017, and January 3, 2016, respectively.
Income Taxes
Income Taxes
Income Taxes
The Company’s income tax provision (benefit) was comprised of the following:    
 
Year Ended
 
December 31, 2017
 
January 1, 2017
 
January 3, 2016
Current:
 
 
 
 
 
Federal
$
(5,718
)
 
$
11,979

 
$
14,086

Foreign
346

 
372

 
396

State
445

 
1,865

 
2,081

 
(4,927
)
 
14,216

 
16,563

Deferred:
 
 
 
 
 
Federal
(1,059
)
 
(4,908
)
 
5,318

State
(1,649
)
 
(792
)
 
139


(2,708
)
 
(5,700
)
 
5,457

Valuation allowance
(120
)
 
(180
)
 
26

 
$
(7,755
)
 
$
8,336

 
$
22,046


Deferred income taxes reflect the effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The components of deferred income tax assets and liabilities at December 31, 2017 and January 1, 2017 were as follows:
 
 
December 31, 2017
 
January 1, 2017
Deferred income tax assets:
 
 
 
 
  Accrued vacation benefits
 
1,051

 
1,640

  Incentive compensation
 
924

 
986

  Other accruals
 
3,187

 
3,924

  Deferred income on sale-leaseback of real estate
 
5,422

 
9,861

  Lease financing obligations
 

 
162

  Occupancy costs
 
6,669

 
8,036

  Tax credit carryforwards
 
883

 
1,148

  Property and equipment depreciation
 
1,665

 

  Other
 
1,073

 
1,738

        Gross deferred income tax assets
 
20,874

 
27,495

Deferred income tax liabilities:
 
 
 
 
  Property and equipment depreciation
 

 
(8,311
)
  Amortization of other intangibles, net
 
(2,094
)
 
(3,250
)
  Other
 
(812
)
 
(701
)
        Gross deferred income tax liabilities
 
(2,906
)
 
(12,262
)
  Less: Valuation allowance
 
(736
)
 
(856
)
Net deferred income tax assets
 
$
17,232

 
$
14,377


The Company establishes a valuation allowance to reduce the carrying amount of deferred income tax assets when it is more likely than not that it will not realize some portion or all of the tax benefit of its deferred tax assets. The Company evaluates whether its deferred income tax assets are probable of realization on a quarterly basis. In performing this analysis, the Company considers all available evidence including historical operating results, the estimated timing of future reversals of existing taxable temporary differences and estimated future taxable income exclusive of reversing temporary differences and carryforwards. At December 31, 2017 and January 1, 2017, the Company had a valuation allowance of $736 and $856 respectively, against net deferred income tax assets due to foreign income tax credit carryforwards where it was determined to be more likely than not that
the deferred income tax asset amounts would not be realized. The valuation allowance decreased $120 and $180 in 2017 and 2016, respectively, primarily due to foreign tax credit carryforwards, net of expired foreign income tax credits. The estimation of future taxable income for federal and state purposes and the Company's ability to realize deferred income tax assets can significantly change based on future events and operating results.
The Company's effective tax rate was 17.6%, 33.3%, and 36.4% for the years ended December 31, 2017, January 1, 2017 and January 3, 2016, respectively. A reconciliation of the statutory federal income tax provision (benefit) to the effective tax provision (benefit) was as follows:
 
Year Ended
 
December 31, 2017
 
January 1, 2017
 
January 3, 2016
Statutory federal income tax provision (benefit)
$
(15,394
)
 
$
8,767

 
$
21,204

State income taxes, net of federal benefit
(734
)
 
689

 
1,435

Change in valuation allowance
(120
)
 
(180
)
 
26

Change in federal income tax rate
8,952

 

 

Net share-based compensation-tax benefit deficiencies(1)
228

 

 

Non-deductible expenses
84

 
(3
)
 
260

Foreign taxes
346

 
372

 
396

Employment tax credits
(914
)
 
(905
)
 
(889
)
Foreign tax credits/deductions
(121
)
 
(372
)
 
(396
)
Other
(82
)
 
(32
)
 
10

 
$
(7,755
)
 
$
8,336

 
$
22,046


(1) See Note 1-- Basis of Presentation Guidance Adopted in 2017.
On December 22, 2017, the Tax Cuts and Jobs Act (the "Act"), which includes a provision that reduces the federal corporate income tax rate from 35.0% to 21.0% effective January 1, 2018, was signed into law. In accordance with generally accepted accounting principles, the enactment of this new tax legislation required the Company to revalue its net deferred income tax assets at the new corporate statutory rate of 21.0% as of the enactment date, which resulted in a one-time adjustment to its deferred income taxes of $9.0 million with a corresponding increase to the provision for income taxes as a discrete item during the fourth quarter of 2017. For fiscal years after 2017, the Company's federal statutory tax rate will be 21%.
On December 22, 2017, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 118 (SAB 118), which provides guidance on accounting for the impact of the Act, that, in effect, allows entities to use a methodology similar to the measurement period in a business combination. Pursuant to the disclosure provisions of SAB 118, the Company continues to evaluate the impact of the Act on various matters. The actual impact of the Act on the Company may differ from the provisional amounts recognized based on its reasonable estimates due to, among other things, changes in assumptions made in the Company's interpretation of the Act, guidance related to application of the Act that may be issued in the future, and actions that the Company may take as a result of the expected impact of the Act. The Company will adjust the amounts recognized related to the Act if more information becomes available.
The Company recognizes interest and/or penalties related to uncertain tax positions in income tax expense. As of December 31, 2017, and January 1, 2017, the Company had no unrecognized tax benefits and no accrued interest related to uncertain tax positions.
The Company has tax benefits related to a federal net operating loss and employment tax credits totaling $5.4 million in 2017 that it expects to realize by carryback to prior years. The Company has a deferred tax benefit related to state net operating loss carryforwards of $0.2 million that will expire at various times from 2031 to 2037 depending on the tax jurisdiction.
The tax years 2014-2016 remain open to examination by the taxing jurisdictions to which the Company is subject. Although it is not reasonably possible to estimate the amount by which unrecognized tax benefits may increase within the next twelve months due to uncertainties regarding the timing of any examinations, the Company does not expect unrecognized tax benefits to significantly change in the next twelve months.
Stock-Based Compensation
Stock-Based Compensation
Stock-Based Compensation
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. The aggregate number of shares of stock authorized for distribution under the Fiesta Plan is 3,300,000. As of December 31, 2017, there were 1,874,854 shares available for future grants under the Fiesta Plan.
During the years ended December 31, 2017, January 1, 2017 and January 3, 2016, the Company granted certain employees in the aggregate 182,522, 50,087 and 24,401 non-vested restricted shares, respectively, under the Fiesta Plan. Shares granted to employees during the years ended December 31, 2017, January 1, 2017 and January 3, 2016 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 during the years ended December 31, 2017, January 1, 2017 and January 3, 2016 was $20.75, $35.25 and $61.57, respectively.
During the years ended December 31, 2017, January 1, 2017 and January 3, 2016, the Company granted non-employee directors 38,596, 14,081 and 8,698 non-vested restricted shares, respectively, under the Fiesta Plan. The weighted average fair value at the grant date for restricted non-vested shares issued to directors during the twelve months ended December 31, 2017, January 1, 2017 and January 3, 2016 was $21.25, $33.39 and $54.06, respectively. These shares vest and become non-forfeitable over a one year vesting period, or for certain grants to new directors, over a five year vesting period.
During the years ended December 31, 2017, January 1, 2017 and January 3, 2016, the Company granted certain employees 11,745, 5,762 and 10,007 restricted stock units, respectively, under the Fiesta Plan. 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 the restricted stock units issued to employees during the years ended December 31, 2017, January 1, 2017 and January 3, 2016 was $20.75, $35.25 and $62.05.
Also during the year ended December 31, 2017, the Company granted 92,171 restricted stock units under the Fiesta Plan to certain employees subject to continued service requirements and market performance conditions:
The Company granted its Chief Executive Officer 72,290 restricted stock units, which vest in four tranches over a four year vesting period subject to continued service and attainment of specified share prices of the Company's Common Stock during 20 consecutive trading days at any point during each year. Each tranche vests by the end of a one year period if the specified target stock price condition for that year is met. If the specified target stock price condition for any tranche is not met for the year, the cumulative unearned units will be rolled over to subsequent tranches on a pro rata basis. The number of shares into which these restricted stock units convert ranges from no shares, if the service and market performance conditions are not met, to 72,290 shares, if the service and market performance conditions are met in the fourth year. The weighted average fair value at grant date for these restricted stock units was $12.90.
The Company granted certain executives 19,881 restricted stock units which vest in three tranches over a three year vesting period subject to continued service and attainment of specified share price of the Company's Common Stock. The number of shares into which these restricted stock units convert ranges from no shares, if the service and market performance conditions are not met, to 19,881 shares, if the service and market performance conditions are met in the third year. The weighted average fair value of these restricted stock units were $9.31.
During the years ended January 1, 2017 and January 3, 2016, the Company granted 33,691 and 17,501 non-vested restricted shares, respectively, and 33,691 and 17,501 restricted stock units, respectively, 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 financial 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 based on the attainment of certain financial performance conditions and for the restricted stock units granted during the years ended January 1, 2017 and January 3, 2016, ranges from no shares, if the minimum financial performance condition is not met, to 67,382 and 35,002 shares, respectively, if the maximum financial performance condition is met. The weighted average fair value at grant date for both restricted non-vested shares and restricted stock units subject to financial performance conditions granted during the years ended January 1, 2017 and January 3, 2016 was $35.25 and $65.01, respectively.
Stock-based compensation expense is measured at the grant date based on the fair value of the award and is recognized as expense over the applicable requisite service period of the award (the vesting period) using the straight-line method, or for restricted stock units subject to market performance conditions using the accelerated method. Stock-based compensation expense for the years ended December 31, 2017, January 1, 2017 and January 3, 2016 was $3.5 million, $3.3 million and $4.3 million, respectively. As of December 31, 2017, the total unrecognized stock-based compensation expense related to non-vested shares and restricted
stock units was approximately $4.9 million. At December 31, 2017, the remaining weighted average vesting period for non-vested restricted shares was 2.5 years and restricted stock units was 1.4 years.
A summary of all non-vested restricted shares and restricted stock units activity for the year ended December 31, 2017 is as follows:
 
Non-Vested Shares
 
Restricted Stock Units
 
Shares
 
Weighted Average Grant Date
Price
 
Units
 
Weighted Average Grant Date
Price
Outstanding at January 1, 2017
129,352

 
$
37.94

 
51,445

 
$
46.59

Granted
221,118

 
20.84

 
103,916

 
13.10

Vested/Released
(90,388
)
 
29.98

 
(1,430
)
 
51.51

Forfeited
(20,582
)
 
32.04

 
(9,985
)
 
35.83

Outstanding at December 31, 2017
239,500

 
$
24.81

 
143,946

 
$
23.11



The fair value of the restricted stock units subject to market conditions was estimated using the Monte Carlo simulation method. The fair value of the non-vested restricted shares and all other restricted stock units is based on the closing price on the date of grant.
The fair value of the shares vested and released during the years ended December 31, 2017, January 1, 2017 and January 3, 2016 was $2.1 million, $5.2 million and $11.9 million, respectively.
Business Segment Information
Business Segment Information
Business Segment Information
The Company owns, operates and franchises two restaurant brands, Pollo Tropical® and Taco Cabana® , each of which is an operating segment. Pollo Tropical restaurants feature citrus marinated, fire-grilled chicken and other freshly prepared tropical inspired menu items, while Taco Cabana restaurants specialize in Mexican inspired food made fresh by hand.
Each segment's accounting policies are the same as those described in the summary of significant accounting policies in Note 1. Prior to the second quarter of 2017, the primary measures of segment profit or loss used to assess performance and allocate resources were income (loss) before taxes and an Adjusted EBITDA measure, which was 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.
In 2017, the Company’s board of directors appointed a new Chief Executive Officer who initiated the Plan and uses an Adjusted EBITDA measure for the purpose of assessing performance and allocating resources to segments. The new Adjusted EBITDA measure used by the chief operating decision maker includes adjustments for significant items that management believes are related to strategic changes and/or are not related to the ongoing operation of the Company’s restaurants. Beginning in the second quarter of 2017, the primary measure of segment profit or loss used by the chief operating decision maker to assess performance and allocate resources is Adjusted EBITDA, which is now defined as earnings attributable to the applicable operating segments before interest expense, income taxes, depreciation and amortization, impairment and other lease charges, stock-based compensation expense, other expense (income), net, and certain significant items for each segment that management believes are related to strategic changes and/or are not related to the ongoing operation of the Company's restaurants as set forth in the reconciliation table below. The Company has included the presentation of Adjusted EBITDA for all periods presented.
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, a current income tax receivable, and advisory fees related to a previously proposed and terminated separation transaction.
Year Ended
 
Pollo Tropical
 
Taco Cabana
 
Other
 
Consolidated
December 31, 2017:
 
 
 
 
 
 
 
 
Restaurant sales
 
$
372,328

 
$
294,256

 
$

 
$
666,584

Franchise revenue
 
1,787

 
761

 

 
2,548

Cost of sales
 
117,493

 
85,395

 

 
202,888

Restaurant wages and related expenses(1)
 
88,587

 
96,155

 

 
184,742

Restaurant rent expense
 
18,949

 
17,987

 

 
36,936

Other restaurant operating expenses
 
52,848

 
46,079

 

 
98,927

Advertising expense
 
16,397

 
9,694

 

 
26,091

General and administrative expense(2)
 
33,244

 
26,900

 

 
60,144

Adjusted EBITDA (unaudited)
 
50,937

 
16,508

 

 
67,445

Depreciation and amortization
 
21,758

 
13,199

 

 
34,957

Capital expenditures
 
31,786

 
20,781

 
3,299

 
55,866

January 1, 2017:
 
 
 
 
 
 
 
 
Restaurant sales
 
$
399,736

 
$
309,220

 
$

 
$
708,956

Franchise revenue
 
2,062

 
752

 

 
2,814

Cost of sales
 
126,539

 
88,070

 

 
214,609

Restaurant wages and related expenses(1)
 
93,958

 
91,347

 

 
185,305

Restaurant rent expense
 
19,998

 
17,495

 

 
37,493

Other restaurant operating expenses
 
54,198

 
42,259

 

 
96,457

Advertising expense
 
14,819

 
11,981

 

 
26,800

General and administrative expense(2)
 
33,776

 
21,486

 
822

 
56,084

Adjusted EBITDA (unaudited)
 
58,286

 
38,281

 

 
96,567

Depreciation and amortization
 
23,587

 
13,189

 

 
36,776

Capital expenditures
 
65,789

 
13,206

 
3,370

 
82,365

January 3, 2016:
 
 
 
 
 
 
 
 
Restaurant sales
 
$
364,544

 
$
320,040

 
$

 
$
684,584

Franchise revenue
 
2,197

 
611

 

 
2,808

Cost of sales
 
121,689

 
95,639

 

 
217,328

Restaurant wages and related expenses(1)
 
81,647

 
92,575

 

 
174,222

Restaurant rent expense
 
16,003

 
17,100

 

 
33,103

Other restaurant operating expenses
 
45,376

 
41,909

 

 
87,285

Advertising expense
 
9,527

 
12,090

 

 
21,617

General and administrative expense(2)
 
31,142

 
23,379

 

 
54,521

Adjusted EBITDA (unaudited)
 
61,265

 
39,775

 

 
101,040

Depreciation and amortization
 
18,000

 
12,575

 

 
30,575

Capital expenditures
 
73,129

 
12,294

 
2,147

 
87,570

Identifiable Assets:
 
 
 
 
 
 
 
 
December 31, 2017
 
$
227,194

 
$
167,237

 
$
28,882

 
$
423,313

January 1, 2017
 
263,868

 
165,195

 
12,502

 
441,565

January 3, 2016
 
237,065

 
165,549

 
13,031

 
415,645


(1) Includes stock-based compensation expense of $52, $142 and $156 for the years ended  December 31, 2017, January 1, 2017 and January 3, 2016, respectively.
(2) Includes stock-based compensation expense of $3,493, $3,141 and $4,137 for the years ended December 31, 2017, January 1, 2017 and January 3, 2016, respectively.


A reconciliation of consolidated net income (loss) to Adjusted EBITDA follows (unaudited):

Year Ended
 
Pollo Tropical
 
Taco Cabana
 
Other
 
Consolidated
December 31, 2017:
 
 
 
 
 
 
 
 
Net income (loss)
 
 
 
 
 
 
 
$
(36,232
)
Provision for (benefit from) income taxes
 
 
 
 
 
 
 
(7,755
)
Income (loss) before taxes
 
$
(37,831
)
 
$
(6,156
)
 
$

 
$
(43,987
)
Add
 
 
 
 
 
 
 
 
     Non-general and administrative expense adjustments
 
 
 
 
 
 
 
 
          Depreciation and amortization
 
21,758

 
13,199

 

 
34,957

          Impairment and other lease charges
 
57,947

 
3,813

 

 
61,760

          Interest expense
 
1,348

 
1,529

 

 
2,877

          Other expense (income), net
 
2,208

 
(529
)
 

 
1,679

          Stock-based compensation expense in restaurant wages
 
(4
)
 
56

 

 
52

          Unused pre-production costs in advertising expense
 
322

 
88

 

 
410

                Total Non-general and administrative expense adjustments
 
83,579

 
18,156

 

 
101,735

     General and administrative expense adjustments
 
 
 
 
 
 
 
 
          Stock-based compensation expense
 
1,983

 
1,510

 

 
3,493

          Terminated capital project
 
484

 
365

 

 
849

          Board and shareholder matter costs
 
1,738

 
1,311

 

 
3,049

          Write-off of site development costs
 
219

 
292

 

 
511

          Plan restructuring costs and retention bonuses
 
1,390

 
1,030

 

 
2,420

          Office restructuring and relocation costs
 
(152
)
 

 

 
(152
)
          Legal settlements and related costs
 
(473
)
 


 

 
(473
)
               Total General and administrative expense adjustments
 
5,189

 
4,508

 

 
9,697

Adjusted EBITDA
 
$
50,937

 
$
16,508

 
$

 
$
67,445

 
 
 
 
 
 
 
 
 
January 1, 2017:
 
 
 
 
 
 
 
 
Net income (loss)
 
 
 
 
 
 
 
$
16,712

Provision for (benefit from) income taxes
 
 
 
 
 
 
 
8,336

Income (loss) before taxes
 
$
4,639

 
$
21,231

 
$
(822
)
 
$
25,048

Add
 
 
 
 
 
 
 
 
     Non-general and administrative expense adjustments
 
 
 
 
 
 
 
 
          Depreciation and amortization
 
23,587

 
13,189

 

 
36,776

          Impairment and other lease charges
 
24,419

 
1,225

 

 
25,644

          Interest expense
 
930

 
1,241

 

 
2,171

          Other expense (income), net
 
98

 
(226
)
 

 
(128
)
          Stock-based compensation expense in restaurant wages
 
69

 
73

 

 
142

                Total Non-general and administrative expense adjustments
 
49,103

 
15,502

 

 
64,605

     General and administrative expense adjustments
 
 
 
 
 
 
 
 
          Stock-based compensation expense
 
1,793

 
1,348

 

 
3,141

          Board and shareholder matter costs
 
432

 
326

 
822

 
1,580

          Write-off of site development costs
 
1,138

 
120

 

 
1,258

          Plan restructuring costs and retention bonuses
 
45

 
41

 

 
86

          Office restructuring and relocation costs
 
539

 

 

 
539

          Legal settlements and related costs
 
597

 
(287
)
 

 
310

               Total General and administrative expense adjustments
 
4,544

 
1,548

 
822

 
6,914

 
 
 
 
 
 
 
 
 

Year Ended:
 
Pollo Tropical
 
Taco Cabana
 
Other
 
Consolidated
January 3, 2016:
 
 
 
 
 
 
 
 
Net income (loss)
 
 
 
 
 
 
 
38,536

Provision for (benefit from) income taxes:
 
 
 
 
 
 
 
22,046

Income (loss) before taxes:
 
38,021

 
22,561

 

 
60,582

Add:
 
 
 
 
 
 
 
 
     Non-general and administrative expense adjustments:
 
 
 
 
 
 
 
 
          Depreciation and amortization:
 
18,000

 
12,575

 

 
30,575

          Impairment and other lease charges:
 
510

 
1,872

 

 
2,382

          Interest expense:
 
806

 
1,083

 

 
1,889

          Other expense (income), net:
 
(290
)
 
(389
)
 

 
(679
)
          Stock-based compensation expense in restaurant wages:
 
72

 
84

 

 
156

                Total Non-general and administrative expense adjustments:
 
19,098

 
15,225

 

 
34,323

     General and administrative expense adjustments:
 
 
 
 
 
 
 
 
          Stock-based compensation expense:
 
2,215

 
1,922

 

 
4,137

          Write-off of site development costs:
 
298

 
67

 

 
365

          Legal settlements and related costs:
 
1,633

 

 

 
1,633

               Total General and administrative expense adjustments:
 
4,146

 
1,989

 

 
6,135

Adjusted EBITDA:
 
61,265

 
39,775

 

 
101,040

Net Income per Share
Net Income per Share
Net Income per Share
The Company computes 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 is computed by dividing undistributed earnings allocated to common stockholders 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 to be converted into common shares. Restricted stock units with performance conditions are only included in the diluted earnings per share calculation to the extent that performance conditions have been met at the measurement date. The Company computes 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.
For the twelve months ended December 31, 2017, all restricted stock units outstanding were excluded from the computation of diluted earnings per share because including them would have been antidilutive as a result of the net loss in the period. Weighted average outstanding restricted stock units totaling 9,379 and 4,491 shares were not included in the computation of diluted earnings per share for the twelve months ended January 1, 2017 and January 3, 2016, respectively, because to do so would have been antidilutive.
The computation of basic and diluted net income (loss) per share is as follows:
 
  
Year Ended
 
  
December 31, 2017
 
January 1, 2017
 
January 3, 2016
Basic and diluted net income (loss) per share:
  
 
 
 
 
 
Net income (loss)
  
$
(36,232
)
 
$
16,712

 
$
38,536

Less: income allocated to participating securities
  

 
135

 
441

Net income (loss) available to common stockholders
  
$
(36,232
)
 
$
16,577

 
$
38,095

 
 
 
 
 
 
 
Weighted average common shares, basic
  
26,821,471

 
26,682,227

 
26,515,029

Restricted stock units
 

 
6,952

 
7,167

Weighted average common shares, diluted
 
26,821,471

 
26,689,179

 
26,522,196

 
 
 
 
 
 
 
Basic net income (loss) per common share
  
$
(1.35
)
 
$
0.62

 
$
1.44

Diluted net income (loss) per common share
 
$
(1.35
)
 
$
0.62

 
$
1.44

Commitments and Contingencies
Commitments and Contingencies
Commitments and Contingencies
Lease Assignments. Taco Cabana has assigned three leases to various parties on properties where it no longer operates restaurants with lease terms expiring on various dates through 2029. The assignees are responsible for making the payments required by the leases. The Company is a guarantor under one of the leases, and it remains secondarily liable as a surety with respect to two of the leases. In the third quarter of 2017, Pollo Tropical assigned one lease to a third party on a property where it no longer operates with a lease term expiring in 2033. The assignee is responsible for making the payments required by the lease. The Company is a guarantor under the lease.
The maximum potential liability for future rental payments that the Company could be required to make under these leases at December 31, 2017 was $4.0 million. The Company could also be obligated to pay property taxes and other lease related costs. The obligations under these leases will generally continue to decrease over time as the operating leases expire. The Company does not believe it is probable that it will be ultimately responsible for the obligations under these leases.
Legal Matters. The Company is a party to legal proceedings incidental to the conduct of business, including the matter described below. 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.
On November 24, 2015, Pollo Tropical received a legal demand letter alleging that assistant managers were misclassified as exempt from overtime wages under the Fair Labor Standards Act. On September 30, 2016, prior to any suit being filed, Pollo Tropical reached a settlement with seven named individuals and a proposed collective action class that will allow current and former assistant managers to receive notice and opt-in to the settlement. Pollo Tropical denies any liability or unlawful conduct. The Company has recorded a charge of $0.8 million to cover the estimated costs related to the settlement, including estimated payments to individuals that opt-in to the settlement, premium payments to named individuals, attorneys’ fees for the individuals' counsel, and related settlement administration costs. The charge does not include legal fees incurred by Pollo Tropical in defending the action. During the fourth quarter of 2017, the settlement agreement was approved by the arbitrator and the arbitrator's award was confirmed by a Florida state judge on December 29, 2017. The settlement will result in dismissal with prejudice for the named individuals and all individuals that opt-in to the settlement.
The Company is also 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.
Contingency Related to Insurance Recoveries. During the third quarter of 2017, Texas and Florida were struck by Hurricane Harvey and shortly thereafter by Hurricane Irma (the "Hurricanes"). 43 Taco Cabana and two Pollo Tropical restaurants in the Houston metropolitan area and all 149 Pollo Tropical restaurants in Florida and the Atlanta metropolitan area were closed and affected by the Hurricanes to varying degrees (e.g. property preparation and damages, inventory losses, payment of hourly employees while restaurants were closed, lost business related to temporary closures, limited menu and modified hours of operations). Other Texas markets where the Company operates restaurants including San Antonio were also affected by Hurricane
Harvey, but to a lesser degree. All of the restaurants that were closed have re-opened except for one Taco Cabana restaurant and two Pollo Tropical restaurants in Houston that were permanently closed. The Company maintains comprehensive insurance coverage on all of its restaurants including property, flood and business interruption. In 2017, the Company recorded expected insurance proceeds of $0.7 million and $0.2 million for Pollo Tropical and Taco Cabana, respectively, for the inventory loss and idle time wages paid to hourly employees due to the Hurricanes. The Company also recorded expected insurance proceeds of $0.2 million, which represents a portion of expected insurance proceeds for a Taco Cabana restaurant with extensive flood damage. The Company will record additional expected insurance proceeds related to this and other hurricane affected restaurants in future periods when additional information is available or, for business interruption coverage for lost profit, at the time of final settlement.
Retirement Plans
Retirement Plans
Retirement Plans
Fiesta offers the Company's salaried employees the option to participate in the Fiesta Corporation Retirement Savings Plan (the “Retirement Plan”). The Retirement Plan includes a savings option pursuant to section 401(k) of the Internal Revenue Code in addition to a post-tax savings option. Fiesta may elect to contribute to the Retirement Plan on an annual basis. Contributions made by Fiesta to the Retirement Plan for the Company's employees are made after the end of each plan year. For 2017, 2016 and 2015, Fiesta's discretionary annual contribution is equal to 50% of the employee's contribution up to the first 6% of eligible compensation for a maximum Fiesta contribution of 3% of eligible compensation per participating employee. Under the Retirement Plan, Fiesta contributions begin to vest after 1 year and fully vest after 5 years of service. A year of service is defined as a plan year during which an employee completes at least 1,000 hours of service. Participating employees may contribute up to 50% of their salary annually to either of the savings options, subject to other limitations. The employees have various investment options available under a trust established by the Retirement Plan. Retirement Plan employer matching expense for the years ended December 31, 2017, January 1, 2017 and January 3, 2016 was $0.4 million, $0.3 million and $0.3 million respectively.
Fiesta also has a Deferred Compensation Plan which permits employees not eligible to participate in the Retirement Plan because they have been excluded as “highly compensated” employees (as so defined in the Retirement Plan) to voluntarily defer portions of their base salary and annual bonus. All amounts deferred by the participants earn interest at 8% per annum. There is no Company matching on any portion of the funds. At December 31, 2017 and January 1, 2017, a total of $1.0 million and $2.0 million, respectively, was deferred by the Company's employees under the Deferred Compensation Plan, including accrued interest.
Selected Quarterly Financial and Earnings Data (Unaudited)
Selected Quarterly Financial and Earnings Data (Unaudited)
Selected Quarterly Financial and Earnings Data (Unaudited)
 
Year Ended December 31, 2017
 
First Quarter
 
Second Quarter
 
Third Quarter
 
Fourth Quarter
Revenue
$
175,607

 
$
172,624

 
$
158,691

 
$
162,210

Loss from operations(1)
(23,118
)
 
(2,278
)
 
(12,412
)
 
(3,302
)
Net loss(2)
(15,060
)
 
(2,160
)
 
(8,257
)
 
(10,755
)
Basic net loss per share
$
(0.56
)
 
$
(0.08
)
 
$
(0.31
)
 
$
(0.40
)
Diluted net loss per share
$
(0.56
)
 
$
(0.08
)
 
$
(0.31
)
 
$
(0.40
)
 
 
 
 
 
 
 
 
 
Year Ended January 1, 2017
 
First Quarter
 
Second Quarter
 
Third Quarter
 
Fourth Quarter
Revenue
$
176,677

 
$
181,532

 
$
182,256

 
$
171,305

Income (loss) from operations(1)
16,141

 
14,576

 
(6,737
)
 
3,239

Net income (loss)
9,895

 
8,916

 
(4,531
)
 
2,432

Basic net income (loss) per share
$
0.37

 
$
0.33

 
$
(0.17
)
 
$
0.09

Diluted net income (loss) per share
$
0.37

 
$
0.33

 
$
(0.17
)
 
$
0.09


(1) The Company recognized impairment and other lease charges of $32.4 million, $10.8 million, $15.9 million and $2.7 million in the first, second, third and fourth quarters of 2017, respectively, and $18.5 million and $7.0 million in the third and fourth quarters of 2016, respectively. See Note 5 -- Impairment of Long-lived Assets and Other Lease Charges.
(2) On December 22, 2017, the Act, which includes a provision to reduce the federal corporate income tax rate from 35.0% to 21.0% effective January 1, 2018, was signed into law. In accordance with generally accepted accounting principles, the enactment of this new tax legislation required the Company to revalue its net deferred income tax assets at the new corporate statutory rate of 21.0% as of the enactment date, which resulted in a one-time adjustment to its deferred income taxes of $9.0 million with a corresponding increase to the provision for income taxes as a discrete item during the fourth quarter of 2017. For fiscal years after 2017, the Company's federal statutory tax rate will be 21%. See Note 9 -- Income Taxes.
SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS
SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS
SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2017, JANUARY 1, 2017 AND JANUARY 3, 2016
(In thousands of dollars)

 
 
Column B
 
Column C
 
Column D
 
Column E
Description
 
Balance at
beginning of period
 
Charged to
costs and
expenses
Charged to
other
accounts
 
Deduction
 
Balance
at end of
period
Year Ended December 31, 2017:
 
 
 
 
 
 
 
 
 
Deferred income tax valuation allowance
 
$
856

 
$
(120
)
$

 
$

 
$
736

Year Ended January 1, 2017:
 
 
 
 
 
 
 
 
 
Deferred income tax valuation allowance
 
1,036

 
(180
)

 

 
856

Year Ended January 3, 2016:
 
 
 
 
 
 
 
 
 
Deferred income tax valuation allowance
 
1,010

 
26


 

 
1,036

Basis of Presentation (Policies)
12 Months Ended
Dec. 31, 2017
Organization, Consolidation and Presentation of Financial Statements [Abstract]
 
Basis of Consolidation
Basis of Consolidation. The consolidated financial statements presented herein reflect the consolidated financial position, results of operations and cash flows of Fiesta and its wholly-owned subsidiaries. All intercompany transactions have been eliminated in consolidation. 
Fiscal Year
Use of Estimates
Use of Estimates. The preparation of the consolidated financial statements in conformity with U.S. Generally Accepted Accounting Principles ("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. 
Reclassifications
Cash and Cash Equivalents
Cash and Cash Equivalents. The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. 
Inventories
Inventories. Inventories, primarily consisting of food and paper, are stated at the lower of cost (first-in, first-out) or market. 
Property and Equipment
Goodwill
Long-Lived Assets
Long-Lived Assets. The Company assesses the recoverability of property and equipment and definite-lived intangible assets by determining whether the carrying value of these assets can be recovered over their respective remaining lives through undiscounted future operating cash flows. Impairment is reviewed whenever events or changes in circumstances indicate that the carrying amounts of these assets may not be fully recoverable. 
Deferred Financing Costs
Deferred Financing Costs. Financing costs incurred in obtaining revolving credit facilities are capitalized and amortized over the life of the related obligation as interest expense on a straight-line basis. 
Leases
Revenue Recognition
Gift cards. The Company sells gift cards to its customers in its restaurants and through select third parties. The Company recognizes revenue from gift cards upon redemption by the customer. The gift cards have no stated expiration dates. Revenues from unredeemed gift cards are not material to the Company's financial statements. Revenue Recognition. Revenues from the Company's owned and operated restaurants are recognized when payment is tendered at the time of sale. Franchise royalty revenues are based on a percent of gross sales and are recorded as income when earned. Franchise fees, which are associated with opening new franchised restaurants, are recognized as income when all required activities have been performed by the Company. Area development fees, which are associated with opening new franchised restaurants in a given market, are recognized as income over the term of the related agreement. 
Income Taxes
Income Taxes. Deferred income tax assets and liabilities are based on the difference between the financial statement and tax bases of assets and liabilities as measured by the tax rates that are anticipated to be in effect when those differences reverse. The deferred tax provision generally represents the net change in deferred tax assets and liabilities during the period. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date. A valuation allowance is established when it is necessary to reduce deferred tax assets to amounts for which realization is more likely than not. The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. 
Advertising Costs
Advertising Costs. All advertising costs are expensed as incurred. 
Cost of Sales
Cost of Sales. The Company includes the cost of food, beverage and paper, net of any discounts, in cost of sales. 
Pre-opening Costs
Insurance
Insurance.  The Company is insured for workers' compensation, general liability and medical insurance claims under policies where it pays all claims, subject to stop-loss limitations both for individual claims and for general liability and certain workers' compensation claims in the aggregate. Losses are accrued based upon estimates of the aggregate liability for claims based on the Company's experience and certain actuarial methods used to measure such estimates. The Company does not discount any of its self-insurance obligations. 
Fair Value of Financial Instruments
Recent Accounting Pronouncements
Business Segment Policy
Net Income per Share
The Company computes 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 is computed by dividing undistributed earnings allocated to common stockholders 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 to be converted into common shares. Restricted stock units with performance conditions are only included in the diluted earnings per share calculation to the extent that performance conditions have been met at the measurement date. The Company computes 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. 
Fiscal Year. The Company uses a 52-53 week fiscal year ending on the Sunday closest to December 31. The fiscal years ended December 31, 2017 and January 1, 2017 each contained 52 weeks.
Reclassification. Lease financing obligations were reclassified to other liabilities - long term to conform with the current year presentation. In addition, prepaid expenses and other current assets were reclassified to a separate line from other in the consolidated statements of cash flows to conform with the current year presentation.
Property and Equipment. The Company capitalizes all direct costs incurred to construct and substantially improve its restaurants. These costs are depreciated and charged to expense based upon their property classification when placed in service. Property and equipment is recorded at cost. Application development stage costs for significant internally developed software projects are capitalized and amortized. Repairs and maintenance activities are expensed as incurred. Depreciation and amortization is provided using the straight-line method over the following estimated useful lives:
Buildings and improvements
5
to
30 years
Equipment
3
to
7 years
Computer hardware and software
3
to
7 years
Assets subject to capital lease
Shorter of useful life or lease term

Leasehold improvements, including new buildings constructed on leased land, are depreciated over the shorter of their estimated useful lives or the underlying lease term. In circumstances where an economic penalty would be presumed by the non-exercise of one or more renewal options under the lease, the Company includes those renewal option periods when determining the lease term. For significant leasehold improvements made during the latter part of the lease term, the Company amortizes those improvements over the shorter of their useful life or an extended lease term. The extended lease term would consider the exercise of renewal options if the value of the improvements would imply that an economic penalty would be incurred without the renewal of the option. Building costs incurred for new restaurants on leased land are depreciated over the lease term, which is generally a twenty-year period.
Goodwill. Goodwill represents the excess purchase price and related costs over the value assigned to the net tangible and identifiable intangible assets acquired by Carrols Restaurant Group, Inc. ("Carrols"), Fiesta's former parent company, from the acquisition of Pollo Tropical in 1998 and Taco Cabana in 2000. Goodwill is not amortized but is tested for impairment at least annually as of the last day of the fiscal year or more frequently if impairment indicators exist.
Leases.  All leases are reviewed for capital or operating classification at their inception. The majority of the Company's leases are operating leases. Many of the lease agreements contain rent holidays, rent escalation clauses and/or contingent rent provisions. Rent expense for leases that contain scheduled rent increases or rent holidays is recognized on a straight-line basis over the lease term, including any option periods included in the determination of the lease term. Contingent rentals are generally based upon a percentage of sales or a percentage of sales in excess of stipulated amounts and are not considered minimum rent payments but are recognized as rent expense when incurred.
Pre-opening Costs. The Company's pre-opening costs are generally incurred beginning four to six months prior to a restaurant opening and generally include 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.
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 under current market conditions. 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 the Company's senior credit facility, which is considered Level 2, is based on current LIBOR rates.
Recent Accounting Pronouncements. In May 2014, and in subsequent updates, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers (Topic 606), which amends the guidance in former Topic 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 non-financial assets, such as property and equipment, including real estate. The Company does not believe the standard will impact its recognition of revenue from restaurants or its recognition of franchise royalty revenues, which are based on a percent of gross sales. The Company expects the provisions to primarily impact franchise and development fees and gift card programs and does not expect the standard to have a material effect on its financial statements. The Company plans to use the modified retrospective approach to adopt the standard and expects to recognize a cumulative effect adjustment to increase retained earnings by less than $0.1 million related to franchise and development fees and gift card breakage. The new standard is effective for the Company's interim and annual periods beginning after December 15, 2017.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which requires lessee recognition of lease assets and lease liabilities on the balance sheet and disclosure of key information about leasing arrangements. For the Company, the new standard is effective for interim and annual periods beginning after December 15, 2018, and early adoption is permitted. A modified retrospective approach is required with an option to use certain practical expedients. The new guidance is required to be applied at the beginning of the earliest comparative period presented. The Company is currently evaluating the impact on its financial statements. Although the impact is not currently estimable, the Company expects to recognize lease assets and lease liabilities for most of the leases it currently accounts for as operating leases. In addition, for the Company's leases that are classified as sale-leaseback transactions, the Company will be required to record an initial adjustment to retained earnings associated with the previously deferred gains, and for any future transactions, the gain, adjusted for any off-market terms, will be recorded immediately. Currently the Company amortizes sale-leaseback gains over the lease term. The Company is continuing its assessment and may identify other impacts.
In January 2017, the FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment, which eliminates the requirement to calculate the implied fair value of goodwill if the fair value of a reporting unit is less than the carrying amount of the reporting unit. Instead, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss will be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. The guidance will be effective for interim and annual periods beginning after December 15, 2019. Early adoption is permitted for any goodwill impairment tests after January 1, 2017. This standard may have an impact on the Company's financial statements if goodwill impairment is recognized in future periods.
Each segment's accounting policies are the same as those described in the summary of significant accounting policies in Note 1. Prior to the second quarter of 2017, the primary measures of segment profit or loss used to assess performance and allocate resources were income (loss) before taxes and an Adjusted EBITDA measure, which was 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.
In 2017, the Company’s board of directors appointed a new Chief Executive Officer who initiated the Plan and uses an Adjusted EBITDA measure for the purpose of assessing performance and allocating resources to segments. The new Adjusted EBITDA measure used by the chief operating decision maker includes adjustments for significant items that management believes are related to strategic changes and/or are not related to the ongoing operation of the Company’s restaurants. Beginning in the second quarter of 2017, the primary measure of segment profit or loss used by the chief operating decision maker to assess performance and allocate resources is Adjusted EBITDA, which is now defined as earnings attributable to the applicable operating segments before interest expense, income taxes, depreciation and amortization, impairment and other lease charges, stock-based compensation expense, other expense (income), net, and certain significant items for each segment that management believes are related to strategic changes and/or are not related to the ongoing operation of the Company's restaurants as set forth in the reconciliation table below. The Company has included the presentation of Adjusted EBITDA for all periods presented.
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, a current income tax receivable, and advisory fees related to a previously proposed and terminated separation transaction.
Basis of Presentation (Tables)
Schedule of Property and Equipment Useful Lives
Depreciation and amortization is provided using the straight-line method over the following estimated useful lives:
Buildings and improvements
5
to
30 years
Equipment
3
to
7 years
Computer hardware and software
3
to
7 years
Assets subject to capital lease
Shorter of useful life or lease term
Property and equipment consisted of the following:
 
December 31, 2017
 
January 1, 2017
Land and land improvements
$
20,502

 
$
23,395

Owned buildings
17,221

 
22,008

Leasehold improvements (1)
208,499

 
249,507

Equipment
206,436

 
220,397

Assets subject to capital leases
2,057

 
2,057

 
454,715

 
517,364

Less accumulated depreciation and amortization
(220,154
)
 
(246,444
)
 
$
234,561

 
$
270,920


(1) Leasehold improvements include the cost of new buildings constructed on leased land.
Prepaid Expenses and Other Current Assets (Tables)
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets, consist of the following:
 
December 31, 2017
 
January 1, 2017
Prepaid contract expenses
$
3,681

 
$
2,089

Assets held for sale(1)
2,705

 

Other
3,719

 
2,142

 
$
10,105

 
$
4,231

(1) See Note 5 -- Impairment of Long-lived Assets.
Property and Equipment (Tables)
Schedule of Property and Equipment
Depreciation and amortization is provided using the straight-line method over the following estimated useful lives:
Buildings and improvements
5
to
30 years
Equipment
3
to
7 years
Computer hardware and software
3
to
7 years
Assets subject to capital lease
Shorter of useful life or lease term
Property and equipment consisted of the following:
 
December 31, 2017
 
January 1, 2017
Land and land improvements
$
20,502

 
$
23,395

Owned buildings
17,221

 
22,008

Leasehold improvements (1)
208,499

 
249,507

Equipment
206,436

 
220,397

Assets subject to capital leases
2,057

 
2,057

 
454,715

 
517,364

Less accumulated depreciation and amortization
(220,154
)
 
(246,444
)
 
$