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EX-32.2 - CHIEF FINANCIAL OFFICER'S CERTIFICATE PURSUANT TO 18 U.S.C. SECTION 1350 - Fiesta Restaurant Group, Inc.frgi-ex322_20141228.htm
EX-32.1 - CHIEF EXECUTIVE OFFICER'S CERTIFICATE PURSUANT TO 18 U.S.C. SECTION 1350 - Fiesta Restaurant Group, Inc.frgi-ex321_20141228.htm
EX-21.1 - SUBSIDIARIES - Fiesta Restaurant Group, Inc.frgi-ex211_20141228.htm
EX-23.1 - CONSENT OF INDEPENDENT REGISTERED ACCOUNTING FIRM - Fiesta Restaurant Group, Inc.frgi-ex231_20141228.htm
EX-31.1 - CHIEF EXECUTIVE OFFICER'S CERTIFICATE PURSUANT TO SECTION 302 - Fiesta Restaurant Group, Inc.frgi-ex311_20141228.htm
EX-31.2 - CHIEF FINANCIAL OFFICER'S CERTIFICATE PURSUANT TO SECTION 302 - Fiesta Restaurant Group, Inc.frgi-ex312_20141228.htm
EX-10.1 - AMENDMENT TO FIESTA RESTAURANT GROUP, INC. 2012 STOCK INCENTIVE PLAN - Fiesta Restaurant Group, Inc.frgi-ex1011_20141228.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549 
FORM 10-K
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 28, 2014
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 001-35373 
FIESTA RESTAURANT GROUP, INC.
(Exact name of Registrant as specified in its charter)
Delaware
 
90-0712224
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
14800 Landmark Boulevard, Suite 500
Addison, TX
 
75254
(Address of principal executive office)
 
(Zip Code)
Registrant’s telephone number, including area code: (972) 702-9300
Securities registered pursuant to Section 12(b) of the Act:
Title of each class:
Name on each exchange on which registered:
Common Stock, par value $.01 per share
The NASDAQ Global Select Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes     x   No  ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.    Yes    ¨    No  x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on their Corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
ý
Accelerated filer
¨
Non-accelerated filer
¨
Smaller reporting company
¨
(Do not check if smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
As of February 12, 2015, Fiesta Restaurant Group, Inc. had 26,782,996 shares of its common stock, $.01 par value, outstanding. The aggregate market value of the common stock held by non-affiliates as of June 29, 2014 of Fiesta Restaurant Group, Inc. was $1,211,174,744.



DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for Fiesta Restaurant Group, Inc.'s 2015 Annual Meeting of Stockholders, which is expected to be filed pursuant to Regulation 14A no later than 120 days after the conclusion of Fiesta Restaurant Group, Inc.'s fiscal year ended December 28, 2014 are incorporated by reference into Part III of this annual report.
 
 




FIESTA RESTAURANT GROUP, INC.
FORM 10-K
YEAR ENDED DECEMBER 28, 2014
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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PART I
Presentation of Information
Throughout this Annual Report on Form 10-K, we refer to Fiesta Restaurant Group, Inc. as “Fiesta Restaurant Group” or "Fiesta" and, together with its consolidated subsidiaries, as “we,” “our” and “us” unless otherwise indicated or the context otherwise requires. Any reference to “Carrols” refers to Carrols Restaurant Group, Inc., a Delaware corporation and our former indirect parent company, and its consolidated subsidiaries (other than Fiesta Restaurant Group and its subsidiaries after the distribution date as defined below), unless otherwise indicated or the context otherwise requires.
We own, operate and franchise two fast-casual restaurant brands, Pollo Tropical® and Taco Cabana®, through our 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”). We were incorporated in April 2011. In May 2011, Carrols contributed all of the outstanding capital stock of Pollo Tropical and Taco Cabana to Fiesta Restaurant Group in exchange for all of its outstanding capital stock, and Fiesta Restaurant Group became a wholly-owned subsidiary of Carrols. On May 7, 2012, which we refer to as the "distribution date", Carrols completed the spin-off of Fiesta, and Fiesta became an independent public company, through the distribution of all of the outstanding shares of Fiesta Restaurant Group's common stock to the stockholders of Carrols (the "Spin-off"). As a result of the Spin-off, as of the distribution date we became an independent public company and our common stock is traded on The NASDAQ Global Select Market under the symbol “FRGI.”
We use a 52 or 53 week fiscal year ending on the Sunday closest to December 31. The fiscal years ended January 2, 2011, January 1, 2012, December 30, 2012, December 29, 2013 and December 28, 2014 each contained 52 weeks. Our next fiscal year to contain 53 weeks will be 2015.
In this Annual Report on Form 10-K, we refer to information, forecasts and statistics regarding the restaurant industry. Unless otherwise indicated, all restaurant industry data in this Annual Report on Form 10-K refers to the U.S. restaurant industry and is taken from or based upon the Technomic, Inc. (“Technomic”) report titled “2014 Technomic Top 500 Chain Restaurant Report.” In this Annual Report on Form 10-K we also refer to information, forecasts and statistics from the U.S. Census Bureau and the U.S. Department of Agriculture. The information, forecasts and statistics we have used from Technomic may reflect rounding adjustments.
Use of Non-GAAP Financial Measures
Adjusted EBITDA, Adjusted EBITDA margin, Restaurant-Level Adjusted EBITDA and Restaurant-Level Adjusted EBITDA margin are all non-GAAP financial measures. Adjusted EBITDA is defined as earnings before interest, loss on extinguishment of debt, income taxes, depreciation and amortization, impairment and other lease charges, stock-based compensation expense and other income and expense. Adjusted EBITDA may not be necessarily comparable to other similarly titled captions of other companies due to differences in methods of calculation. Adjusted EBITDA for each of our Pollo Tropical and Taco Cabana segments includes an allocation of general and administrative expenses associated with administrative support for executive management, information systems and certain accounting, legal, supply chain, development and other administrative functions. Adjusted EBITDA margin represents Adjusted EBITDA divided by total revenues. Restaurant-Level Adjusted EBITDA represents Adjusted EBITDA excluding franchise royalty revenues and fees and general and administrative expenses (including corporate-level general and administrative expenses). Restaurant-Level Adjusted EBITDA margin represents Restaurant-Level Adjusted EBITDA divided by restaurant sales.
Management believes that such financial measures, when viewed with our results of operations calculated in accordance with GAAP and our reconciliation of Restaurant-Level Adjusted EBITDA and Adjusted EBITDA to net income (i) provide useful information about our operating performance and period-over-period growth, (ii) provide additional information that is useful for evaluating the operating performance of our business and (iii) permit investors to gain an understanding of the factors and trends affecting our ongoing earnings, from which capital investments are made and debt is serviced. However, such measures are not measures of financial performance or liquidity under GAAP and, accordingly, should not be considered as alternatives to net income or cash flow from operating activities as indicators of operating performance or liquidity. Also these measures may not be comparable to similarly titled captions of other companies.
All of such non-GAAP financial measures have important limitations as analytical tools. These limitations include the following:
such financial information does not reflect our capital expenditures, future requirements for capital expenditures or contractual commitments to purchase capital equipment;
such financial information does not reflect interest expense or the cash requirements necessary to service our debt;

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although depreciation and amortization are non-cash charges, the assets that we currently depreciate and amortize will likely have to be replaced in the future, and such financial information does not reflect the cash required to fund such replacements; and
such financial information does not reflect the effect of earnings or charges resulting from matters that our management does not consider to be indicative of our ongoing operations. However, some of these charges (such as impairment and other lease charges, other income and expense and stock-based compensation expense) have recurred and may recur.
See Item 6—"Selected Financial Data” for a quantitative reconciliation of Restaurant-Level Adjusted EBITDA and Adjusted EBITDA to the most directly comparable GAAP financial performance measure, which we believe is net income.
Forward-Looking Statements
This 2014 Annual Report on Form 10-K contains "forward-looking" statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. "Forward-looking statements" are any statements that are not based on historical information. Statements other than statements of historical facts included herein, including, without limitation, statements regarding our future financial position and results of operations, business strategy, budgets, projected costs and plans and objectives of management for future operations, are "forward-looking statements." Forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” “estimate” or “continue” or the negative of such words or variations of such words and similar expressions. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions, which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements and we can give no assurance that such forward-looking statements will prove to be correct. Important factors that could cause actual results to differ materially from those expressed or implied by the forward-looking statements, or "cautionary statements," include, but are not limited to:
Increases in food and other commodity costs;
Risks associated with the expansion of our business;
Our ability to manage our growth and successfully implement our business strategy;
General economic conditions, particularly in the retail sector;
Competitive conditions;
Weather conditions;
Fuel prices;
Significant disruptions in service or supply by any of our suppliers or distributors;
Changes in consumer perception of dietary health and food safety;
Labor and employment benefit costs;
Regulatory factors;
The outcome of pending or future legal claims or proceedings;
Environmental conditions and regulations;
Our borrowing costs;
The availability and terms of necessary or desirable financing or refinancing and other related risks and uncertainties;
The risk of an act of terrorism, insurrection or armed conflict involving the United States or any other national or international calamity;
Factors that affect the restaurant industry generally, including product recalls, liability if our products cause injury, ingredient disclosure and labeling laws and regulations, reports of cases of food borne illnesses such as “mad cow” disease and "avian" flu, and the possibility that consumers could lose confidence in the safety and quality of certain food products, as well as negative publicity regarding food quality, illness, injury or other health concerns; and
Other factors discussed under Item 1A—“Risk Factors” and elsewhere herein.


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ITEM 1. BUSINESS
Overview
Our Company
We own, operate and franchise two fast-casual restaurant brands, Pollo Tropical® and Taco Cabana®, which have over 25 and 35 years, respectively, of operating history and loyal customer bases. Our Pollo Tropical restaurants offer a wide variety of freshly prepared Caribbean inspired food, while our Taco Cabana restaurants offer a broad selection of hand-made, freshly prepared and authentic Mexican food. We believe that both brands are differentiated from other restaurant concepts and offer a unique dining experience. We are positioned within the value-oriented fast-casual restaurant segment, which combines the convenience and value of quick-service restaurants with the variety, food quality, décor and atmosphere more typical of casual dining restaurants. Our open display kitchen format allows guests to view and experience our food being freshly-prepared and cooked to order. Additionally, nearly all of our restaurants offer the convenience of drive-thru windows.
For the fiscal year ended December 28, 2014, the average annual sales per restaurant for our company-owned Pollo Tropical restaurants was approximately $2.7 million and approximately $1.8 million for our company-owned Taco Cabana restaurants, which we believe are among the highest in the fast-casual and quick-service segments based on industry data from Technomic. As of December 28, 2014, we owned and operated 124 Pollo Tropical and 167 Taco Cabana restaurants (including two restaurants under the Cabana Grill® logo, which is an elevated, non-24 hour format for Taco Cabana which we are currently testing outside of Texas) for a total of 291 restaurants across five states. We franchise our Pollo Tropical restaurants primarily in international markets, and as of December 28, 2014, we had 37 franchised Pollo Tropical restaurants, including five domestic non-traditional locations on college campuses in Florida. As of December 28, 2014, we had four Taco Cabana franchised restaurants located in New Mexico and three non-traditional Taco Cabana licensed locations in Texas. For the fiscal year ended December 28, 2014, we generated consolidated revenues of $611.1 million, and comparable restaurant sales increased 6.6% for Pollo Tropical and 3.3% for Taco Cabana.
Our Brands. Our restaurants operate in the fast-casual restaurant segment, combining the convenience and value of quick-service restaurants in an appealing atmosphere with the menu variety, use of fresh ingredients, food quality and decor more typical of casual dining restaurants with limited table service and competitive pricing.
Pollo Tropical. Our Pollo Tropical restaurants offer Caribbean inspired menu items, featuring our bone-in chicken marinated in our proprietary blend of tropical fruit juices and grilled over an open flame. Our diverse menu also includes a line of TropiChops® (a casserole bowl of grilled chicken breast, roast pork or grilled vegetables, or in some markets beef, served over white, brown or yellow rice and red or black beans and topped with a variety of freshly-made sauces and salsas), a variety of sandwiches, wraps and salads offered with an array of freshly-made salsas, sauces and Caribbean style made-from-scratch side dishes, including black beans and rice, Yucatan fries and sweet plantains, as well as more traditional menu items such as french fries and corn. We also offer a self-service salsa bar which includes a wide selection of made-from-scratch salsas, sauces, jalapeños, cilantro, onions and other items which allows our guests to further customize their orders. Our restaurants offer Caribbean dessert favorites, such as flan and tres leches, and at certain locations, we offer rum-based beverages and beer. Most menu items are prepared daily in each of our restaurants, which feature open display cooking on large, open-flame grills. We offer both individual and family meal-sized portions which enable us to provide a home meal replacement for our guests. We also offer catering for parties and corporate events.
Our Pollo Tropical restaurants feature dining areas designed to create an inviting, festive and tropical atmosphere. We also provide our guests the option of take-out, and nearly all of our restaurants provide the convenience of drive-thru windows. Our Pollo Tropical restaurants are generally open for lunch, dinner and late night seven days a week. As of December 28, 2014, substantially all of our company-owned Pollo Tropical restaurants were freestanding buildings. Our typical free-standing Pollo Tropical restaurant ranges from 2,800 to 3,700 square feet and provides interior seating for approximately 70 to 90 guests. For the year ended December 28, 2014, the average sales transaction at our company-owned Pollo Tropical restaurants was $10.26, with dinner representing the largest day-part at 53.5%. For the year ended December 28, 2014, our Pollo Tropical brand generated total revenues of $307.5 million and Adjusted EBITDA of $52.7 million, including pre-opening costs of $3.4 million (which include costs incurred prior to opening a restaurant, including restaurant employee wages and related expenses, travel expenditures, recruiting, training, promotional costs associated with the restaurant opening and rent, including any non-cash rent expense recognized during the construction period).
Pollo Tropical opened its first restaurant in 1988 in Miami, Florida. As of December 28, 2014, we owned and operated a total of 124 Pollo Tropical restaurants, of which 107 were located in Florida, ten were located in Texas, five were located in Georgia and two were located in Tennessee. In 2009, through a select upgrade strategy, we introduced an elevated Pollo Tropical concept at certain locations. This elevated format provides guests the same Caribbean inspired menu items with an elevated fast-casual experience that we believe better positions the brand

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for a broader target audience and growth outside of Florida. In 2014, we introduced a new building design in Texas that we believe better differentiates our Pollo Tropical brand with a bolder, more Caribbean-inspired look. Our new company-owned Pollo Tropical restaurants will predominantly use this new design. In addition, in 2015 we will begin a reimaging program to conform most of our existing Pollo Tropical restaurants to the new building design, beginning with our restaurants located in the Orlando market.
We are franchising our Pollo Tropical restaurants primarily internationally, and as of December 28, 2014, we had 37 franchised Pollo Tropical restaurants located in Puerto Rico, Ecuador, Honduras, Trinidad & Tobago, the Bahamas, Venezuela, Panama, the Dominican Republic, Guatemala and on college campuses in Florida. We have agreements for the continued development of franchised Pollo Tropical restaurants in certain of our existing international franchised markets, and we have commitments for additional non-traditional locations in U.S. markets in which we currently operate.
Taco Cabana. Our Taco Cabana restaurants serve fresh, authentic Mexican food, including flame-grilled beef and chicken fajitas served on sizzling iron skillets, quesadillas, hand-rolled flautas, enchiladas, burritos, tacos, fresh-made flour tortillas, a selection of made-from-scratch salsas and sauces, customizable salads served in our Cabana Bowl®, and traditional Mexican and American breakfasts. We also offer a self-service salsa bar which includes a wide selection of made-from-scratch salsas, sauces, jalapeños, cilantro, onions and other items which allows our guests to further customize their orders. We also offer a variety of beverage choices that include soft drinks, our signature frozen margaritas and beer. Most of the menu items are freshly-prepared at each restaurant daily.
Taco Cabana restaurants feature open display cooking that enables guests to observe fajitas cooking on an open grill, a tortilla machine pressing and grilling fresh flour tortillas and the fresh preparation of other menu items. Our Taco Cabana restaurants feature interior dining areas as well as semi-enclosed and outdoor patio areas, which provide a vibrant, contemporary decor and relaxing atmosphere. Additionally, we provide our guests the option of take-out, as well as the convenience of drive-thru windows and catering. Our typical freestanding Taco Cabana restaurants average approximately 3,500 square feet (exclusive of the exterior dining area) and provide seating for approximately 80 guests, with additional outside patio seating for approximately 50 guests. As of December 28, 2014, substantially all of our company-owned Taco Cabana restaurants were freestanding buildings.
Taco Cabana pioneered the Mexican patio cafe concept with its first restaurant in San Antonio, Texas in 1978. As of December 28, 2014, we owned and operated 167 Taco Cabana restaurants, of which 162 were located in Texas, three were located in Oklahoma, and, under the elevated non-24 hour Taco Cabana format, Cabana Grill®, one was located in Georgia and one was located in Florida. As of December 28, 2014, we also had four Taco Cabana franchised restaurants located in New Mexico and three non-traditional Taco Cabana licensed locations in Texas. A majority of our Taco Cabana restaurants are open 24 hours a day, generating guest traffic and restaurant sales balanced across multiple day-parts, with dinner sales representing the largest day-part at 25.8% for the year ended December 28, 2014. For the year ended December 28, 2014, the average sales transaction at our company-owned Taco Cabana restaurants was $8.75. For the year ended December 28, 2014, our Taco Cabana brand generated total revenues of $303.7 million and Adjusted EBITDA of $33.0 million, including pre-opening costs of $0.7 million.
In 2010 we began initiatives to enhance the Taco Cabana concept in certain existing markets with the goal of providing guests with an elevated fast-casual experience and to better position the brand for sustainable growth both within and outside our existing markets. In addition to reimaging the restaurant, service enhancements included our guests ordering at the counter and having their food brought to the table, hand held menus, and Wi-Fi, as well as new menu items. As of December 28, 2014, over 85% of planned Taco Cabana renovations have been completed, with the remaining renovations to be completed in the first half of 2015. The cost of these enhancements has been, and is expected to be, approximately $50,000 to $250,000 per restaurant.
We believe the success of our Pollo Tropical and Taco Cabana brands is a result of the following key attributes:
A variety of made-from-scratch signature dishes with differentiated Caribbean and Mexican flavor profiles designed to appeal to consumers’ desire for freshly-prepared food and healthful menu options;
Balanced sales by day-part with the dinner day-part representing the largest sales day-part, providing a higher average check than our other day-parts;
Broad appeal that attracts consumers that desire differentiated and ethnic flavor profiles and customized and varied product offerings at competitive prices in an appealing atmosphere;
Healthful dining options which include grilled entrée choices and freshly-made menu items;
Operating primarily company-owned restaurants which gives us the ability to control the consistency and quality of the guest experience and the strategic growth of our restaurant operations;

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Significant brand recognition due to high market penetration of company-owned restaurants in our core markets, which provides operating, marketing and distribution efficiencies, convenience for our guests and the ability to effectively manage and enhance brand awareness;
Established infrastructure to manage operations and develop and introduce new menu offerings, positioning us to build guest frequency and broaden our customer base;
Ability to capitalize on the continuing trend towards the fast-casual segment, home meal replacement and the increasing popularity and acceptance of Latin food; and
A strong and well defined corporate culture at all levels based on a commitment to provide high quality food and service at competitive prices.
The Restaurant Industry
According to Technomic, in 2013 total restaurant industry revenue in the United States was $448.8 billion, which represents an increase of 3.2% over the prior year. The historical growth of sales in the U.S. restaurant industry may not be indicative of future growth, and there can be no assurance that sales in the U.S. restaurant industry will grow in the future.
We operate in the fast-casual restaurant segment in which the convenience and value of quick-service restaurants is combined with the variety, food quality, décor and atmosphere more typical of casual dining restaurants. We believe that the fast-casual restaurant segment is the fastest growing segment of the restaurant industry. According to Technomic, 2013 sales growth as compared to 2012 for fast-casual chains in the Technomic Top 500 restaurant chains was 11.0% as compared to 3.4% for the overall Top 500 restaurant chains.
Our Competitive Strengths
We believe we have the following competitive strengths:
Leading Brands in the Attractive Fast-Casual Segment. As of December 28, 2014, we owned, operated and franchised 335 fast-casual restaurants under our Pollo Tropical and Taco Cabana brands which have over 25 and 35 years, respectively, of operating history and loyal customer bases. We offer a variety of signature dishes with Caribbean and Mexican flavor profiles designed to appeal to consumers’ desire for distinctive and flavorful freshly-prepared food and healthful menu options. According to Technomic, the fast-casual segment is the fastest growing segment of the restaurant industry with sales growth of 11.0% in 2013 over 2012 for fast-casual chains in the Technomic Top 500 restaurant chains as compared to 3.4% growth for the overall Top 500 restaurant chains. We believe our brands are well positioned to benefit from the growing consumer demand for fast-casual restaurants because of our high quality, freshly-prepared food, value and differentiation of flavor profiles. In addition, we believe our brand elevation initiatives and reimaging programs have enhanced our Pollo Tropical and Taco Cabana restaurants in certain existing and new markets by providing our guests with an elevated fast-casual experience while better positioning our brands for successful and sustainable future growth.
Commitment to Serving Fresh, High Quality Foods With Broad Appeal. Our Pollo Tropical and Taco Cabana brands are differentiated from other dining options and offer distinct flavor profiles and healthful menu choices that we believe have broad consumer appeal, attract a more diverse customer base and drive guest frequency and loyalty. Pollo Tropical and Taco Cabana are committed to serving made-from-scratch, freshly-prepared food using quality ingredients that are made-to-order and customized for each guest. Our open display kitchen format allows guests to view and experience our food being freshly-prepared and cooked to order. Pollo Tropical’s menu offers dishes inspired from multiple regions throughout the Caribbean, including our featured bone-in chicken marinated in our proprietary blend of tropical fruit juices and grilled over an open flame. Taco Cabana’s menu offers favorites such as sizzling fajitas served hot on an iron skillet and other authentic Mexican dishes. In order to provide variety to our guests and to address changes in consumer preferences, we frequently enhance our menu with seasonal and limited time offerings at our Pollo Tropical restaurants and at our Taco Cabana restaurants. Additionally, our menus include a number of options to address consumers’ increasing focus on healthful eating, convenience and home meal replacement.
Differentiated Menus Offering a Compelling Value Proposition. We believe our fresh, flavorful, high quality food at affordable prices provides guests with a compelling value proposition, enabling us to benefit from consumers’ desire for a more value-oriented fast-casual experience. We believe that the inviting atmosphere, great tasting made-from-scratch menu items, modified table service in our elevated concepts and open display cooking format offer guests freshly-prepared food and a quality dining experience comparable to casual dining, but with the convenience and affordability similar to that of quick-service restaurants. Both of our brands offer a wide range of menu offerings with regional taste profiles and home meal replacement options in generous portion sizes and at price points which appeal to a broad customer base. For the year ended December 28, 2014, the average sales transaction at our company-owned Pollo Tropical and Taco Cabana restaurants was $10.26 and $8.75, respectively, with dinner sales (including home meal replacement) representing the largest day-part at both of our brands and contributing to a higher average transaction. In addition to our every-day value pricing, we selectively use

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promotions and limited time offers which are intended to reinforce our value proposition. Additionally, we offer our guests drive-thru service at the majority of our restaurants in order to provide an additional convenience option and capture more meal occasions for people on-the-go.
Industry Leading AUVs, Comparable Restaurant Sales Growth and Restaurant-Level Operating Margins. For the year ended December 28, 2014, the average annual sales per restaurant for our company-owned Pollo Tropical restaurants was approximately $2.7 million and $1.8 million for our company-owned Taco Cabana restaurants, which we believe are among the highest in the fast-casual and quick-service segments based on industry data from Technomic. Our comparable restaurant sales increased 6.6% and 3.3% at our Pollo Tropical and Taco Cabana restaurants, respectively, for the year ended December 28, 2014. For the year ended December 28, 2014, our company-owned Pollo Tropical restaurants generated an Adjusted EBITDA margin of 17.1% and a Restaurant-Level Adjusted EBITDA margin of 24.7%, including pre-opening costs of $3.4 million, and our company-owned Taco Cabana restaurants generated an Adjusted EBITDA margin of 10.9%, and a Restaurant-Level Adjusted EBITDA margin of 17.7%, including pre-opening costs of $0.7 million.
Significant New Restaurant Growth Potential. Since our Spin-off from Carrols in May 2012, we have refocused our strategy on growing both of our brands which we believe have significant growth potential. We expect Pollo Tropical to be our primary growth vehicle. In addition to growth within their existing markets, we believe both brands can operate successfully in the same markets as we move the Pollo Tropical brand west from Florida and the Taco Cabana brand east from Texas, thereby leveraging the real estate knowledge and operating infrastructure already in place in our core markets. As a part of our expansion strategy for both concepts, we have enhanced our site selection criteria, implemented new initiatives to mitigate increases in development costs and elevated the format of our restaurants, which we believe will be attractive to a broad customer base as we continue to open new restaurants. We have achieved attractive average restaurant sales volumes in our recently opened company-owned restaurants in existing markets which we believe validates our growth strategy. Although new company-owned restaurants in new markets that have not yet reached media efficiency typically open at lower sales volumes than restaurants opened in existing, media-efficient markets, and may take longer to reach average restaurant sales volumes, we continue to believe that investing in these new markets is an important part of our growth strategy. During the year ended December 28, 2014, we opened a total of 22 new company-owned Pollo Tropical restaurants, including ten company-owned restaurants in Texas. In 2015, we anticipate opening 26 to 28 new company-owned Pollo Tropical restaurants, including ten to twelve company-owned restaurants in Texas, up to six company-owned restaurants in Georgia and Tennessee and the balance in Florida, and two to four new company-owned Taco Cabana restaurants.
Well Positioned to Continue to Benefit From a Growing Influence of Hispanic Brands on the General U.S. Population. We expect sales from our restaurants to benefit from the increased popularity and acceptance of Hispanic food in the United States by non-Hispanic consumers. The U.S. Census Bureau forecasts that the growth of the Hispanic population is expected to outpace overall population growth, and the Hispanic population, as a percentage of the total U.S. population, is expected to increase from 17.0% in 2012 to 21.6% by 2030. We believe that the continued growth of the Hispanic population has contributed to an increased acceptance of Hispanic food by the general population.
Well Positioned to Capitalize on Long-Term Population Growth in Markets Served by Our Brands. We expect sales from our restaurants in Florida and Texas to benefit from the projected long-term overall population growth in these markets. The U.S. Census Bureau forecasts these markets to grow at a faster rate than the national average. According to the U.S. Census Bureau, the U.S. population is forecasted to grow by 8.1% from 2014 to 2024, while the populations in Florida and Texas are forecasted to grow by 21.6% and 16.2%, respectively, during the 10 years from 2010 to 2020.
Multiple Levers to Drive Comparable Restaurant Sales and Restaurant-Level Adjusted EBITDA. In 2009, we commenced the launch of a brand elevation program with the intent to increase comparable restaurant sales, maximize profitability and broaden our customer base. As of December 28, 2014 we have completed 85% of our planned Taco Cabana renovations, with the remaining renovations to be completed in the first half of 2015. We also plan to reimage select Pollo Tropical restaurants beginning with the Orlando, Florida market in 2015, which we believe will further differentiate our Pollo Tropical brand with a more Caribbean-inspired look.With a focus on elevating the guest experience and driving comparable restaurant sales, we have added portable menu items and innovative products to drive guest traffic and increase guest frequency, reconfigured indoor/outdoor menu boards to drive average check and product mix and enhanced our brand positioning through our elevated service platform while deleting products with lower sales mix, less brand relevance and more operational complexity. In addition, we have enhanced our advertising strategy to build brand awareness and position both brands as preferred fast-casual destinations. Concurrent with our sales growth strategy, we implemented profit enhancement initiatives focused on food and labor costs and leveraging our scale. We have also enhanced our supply chain expertise resulting in reduced costs and improved food quality, consistency and yield.
Experienced Management Team. We believe that our senior management team’s extensive experience in the restaurant industry, its history of developing and operating quick-service and fast-casual restaurants and deep brand-level operating teams with extensive experience provide us with a competitive advantage.

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Growth Strategies
Our strategies for growth primarily include:
Develop New Restaurants Within and Outside of Our Existing Markets. We believe that we have significant opportunities to develop additional Pollo Tropical and Taco Cabana restaurants within our existing primary markets in Florida and Texas, as well as expansion opportunities into other regions of the United States that match our targeted demographic and site selection criteria, which initially include markets in Texas and the Southeast. We expect Pollo Tropical to be our primary growth vehicle. We believe both brands can operate successfully in the same markets as we move the Pollo Tropical brand west from Florida and Taco Cabana brand east from Texas, thereby leveraging the real estate knowledge and operating infrastructure already in place in our core markets. We are currently targeting new restaurant openings in high profile areas with high household incomes and target population density. In 2014, we opened 26 new company-owned restaurants comprised of 22 new company-owned Pollo Tropical restaurants, and four new company-owned Taco Cabana restaurants, including two locations under the new elevated non 24-hour Taco Cabana concept, Cabana Grill that are located in the Atlanta, Georgia market and in Jacksonville, Florida. We will continue to monitor the performance of these two Cabana Grill locations to determine whether there is significant expansion potential for Cabana Grill outside of the Taco Cabana core Texas market. In addition, in 2015, we are currently planning to open 26 to 28 new company-owned Pollo Tropical restaurants, including ten to twelve in Texas, and two to four new company-owned Taco Cabana restaurants. Pollo Tropical has developed an elevated format which we believe will allow it to be accepted as a general market concept with a broad target audience. This format includes a new exterior design and a more upscale décor that we believe better differentiates our brand with a more Caribbean inspired look; an elevated service platform where food is ordered and then brought to the guest at the table; new menu offerings including rum-based beverages, in some locations, and beer; and numerous other enhancements. The elevated format serves as the model for Pollo Tropical’s expansion outside its core South Florida markets. In 2014, we opened ten company-owned Pollo Tropical restaurants in Texas utilizing this format.
We target opening free-standing company-owned restaurant locations in order to provide drive-thru service which is an important convenience and sales component for our brands. For our new company-owned Pollo Tropical free-standing restaurants we are targeting average annual unit volumes of approximately $2.2 million by the end of the second operating year although results may vary from this target depending on restaurant penetration, brand awareness and media spend in the market, and the location of the restaurant. We are targeting a total cash investment for our new company-owned Pollo Tropical restaurant prototype, excluding costs incurred to lease or acquire land, of approximately $1.4 million to $2.0 million depending on the market and whether we construct a new building or convert an existing building. We target a cash-on-cash return at the end of the second operating year of such restaurants of approximately 25% or greater. For our new company-owned Taco Cabana restaurants we are targeting average annual unit volumes of approximately $1.9 million by the end of the second operating year. We are targeting a total cash investment for our Taco Cabana restaurant prototype, excluding costs incurred to lease or acquire land, of approximately $1.4 million to $1.8 million depending on whether we construct a new building or convert an existing building. We target a cash-on-cash return at the end of the second operating year of such restaurants of approximately 20% or greater.
Increase Comparable Restaurant Sales. We intend to continue to increase comparable restaurant sales by attracting new customers and increasing guest frequency through the following strategies:
Focus on consistency of operations and food quality: We believe the quality, consistency and accuracy of our operations result in an enjoyable guest experience, which drives guest frequency. We will continue to refine our menu offerings, supply chain and food preparation processes to ensure high quality, freshness and consistency of our food which we believe are critical components to the continued success of our brands.
New product innovation: Across both brands, our menus are centered on fresh, high quality food offerings that we believe have both broad appeal and provide everyday value. Pollo Tropical and Taco Cabana each have separate teams of product research and development professionals that enables us to continually refine our menu offerings and develop new products. Maintaining a strong product pipeline is critical to keeping our offerings compelling, and we intend to introduce innovative new items and enhancements to existing menu favorites throughout the year to drive further guest traffic and maximize guest frequency. Also, the addition of portable menu items, such as wraps, sandwiches, bowls and salads, as well as home meal replacement/family meals will continue to be a key focus for both brands as we look to capture more meal occasions for people on the go.
Focus on effective advertising to highlight our everyday value proposition: We plan to continue to refine our advertising and media strategy to continue to reinforce the key attributes of our brands which include high quality, freshly-prepared food, an enhanced guest experience and everyday value. We have experienced success emphasizing the attractive price points of our menu items and believe the reconfiguration of our indoor/outdoor menu boards will continue to drive average check and product mix. Additionally, we revamped our Pollo Tropical and Taco Cabana websites as part of our initiative to elevate our brand positioning across all guest touch points and

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seek to leverage social media marketing. Through our websites, we now provide guests with the opportunity to sign up for our respective eClubs to stay informed regarding product and promotional launches.
Continue our brand elevation and reimage program: We believe that our elevated brand position continues to resonate with guests by enhancing the quality of the guest experience at our restaurants by aligning our image and service with our high quality food offerings. We continue to implement restaurant enhancement initiatives to elevate the dining experience at our Pollo Tropical and Taco Cabana restaurants in select markets. We believe these enhancements improve our brands’ positioning in the fast-casual segment while appealing to a broader demographic. Our restaurant enhancements create an updated, contemporary look that we believe is more relevant to today’s consumers and include changes to both the interior and exterior of our restaurants with the addition of new tables and chairs, upgraded salsa bars and the addition of photos and murals to create a more inviting feel and highlight our fresh ingredients. Our new Pollo Tropical and Taco Cabana enhanced store models also feature modified table service, Wi-Fi and new menu items, as well as hand-held menus and real plates and silverware in certain locations. We believe our elevated Pollo Tropical and Taco Cabana restaurants continue to differentiate us from our competitors. Additionally, we plan to continue our restaurant reimaging efforts as we refresh and upgrade our entire system. As of December 28, 2014, over 85% of planned Taco Cabana renovations have been completed, with the remaining renovations to be completed in the first half of 2015. We also plan to reimage select Pollo Tropical restaurants beginning with the Orlando, Florida market in 2015, which we believe will further differentiate our Pollo Tropical brand with a more Caribbean-inspired look.
Improve Profitability and Optimize Our Infrastructure. Through new restaurant development, growing comparable restaurant sales and growing franchise revenues, we believe we will increase our Adjusted EBITDA. However, because our company-owned restaurants in new markets have lower sales than our company-owned restaurants in markets that have achieved media efficiency and we need to build regional support structures in advance of new company-owned restaurant openings, our Adjusted EBITDA margins could be impacted as we open new company-owned restaurants in new markets. We also believe that our large restaurant base, skilled management team, operating systems and training and development programs support our strategy of enhancing operating efficiencies for our existing restaurants while concurrently growing our restaurant base. We continue to focus on maximizing cost efficiencies, including optimizing our labor model and supply chain initiatives. In addition, as we continue to grow our restaurant base we believe that we will be able to further leverage our size to realize certain benefits from economies of scale.
Franchise Our Pollo Tropical Restaurants Domestically and Internationally and Expand Our Domestic Non-Traditional Licensing for Pollo Tropical and Taco Cabana. We believe that there are a number of domestic markets with the appropriate demographics and consumer preferences to support strategic franchising of the Pollo Tropical brand. We believe there will be franchising opportunities to expand the Pollo Tropical brand footprint in new and existing markets within the United States, and we continue to consider opportunities in the United States for traditional franchising as a longer-term growth opportunity. We intend to be selective with our franchise partners to ensure that our growth is aligned with our overall business objectives.
In addition to traditional franchising, we also believe that there are opportunities in the United States for licensing both the Pollo Tropical and Taco Cabana brands to concessionaires operating in non-traditional venues such as college campuses, airports, hospitals, and sports arenas located in markets where we already have a presence. We currently have five licensed locations on college campuses in the United States, and we have commitments for additional non-traditional locations for both the Pollo Tropical and Taco Cabana brands.
Internationally, our franchisees are currently operating Pollo Tropical restaurants in The Bahamas, Dominican Republic, Ecuador, Guatemala, Honduras, Panama, Puerto Rico, Trinidad & Tobago and Venezuela. We have agreements for the continued development of franchised Pollo Tropical restaurants in certain of our existing international franchised markets. Since restaurant development in foreign jurisdictions requires certain local knowledge and expertise that we do not necessarily possess, we utilize franchisees for expansion in international markets. This permits us to leverage the local knowledge and expertise of our franchisees, and it also provides a lower cost method of penetrating foreign markets.

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Restaurant Operating Data
Selected restaurant operating data for our two restaurant concepts is as follows:
 
 
Year ended
 
 
December 28, 2014
December 29, 2013
December 30, 2012
Pollo Tropical:
 
 
 
 
Average annual sales per company-owned restaurant (in thousands) (1)
 
$
2,720

$
2,666

$
2,538

Average sales transaction
 
$
10.26

$
10.03

$
9.68

Drive-through sales as a percentage of total sales
 
45.3
%
44.7
%
45.0
%
Day-part sales percentages:
 
 
 
 
Lunch
 
46.5
%
46.6
%
46.6
%
Dinner and late night
 
53.5
%
53.4
%
53.4
%
Taco Cabana:
 
 
 
 
Average annual sales per company-owned restaurant (in thousands) (1)
 
$
1,831

$
1,783

$
1,768

Average sales transaction
 
$
8.75

$
8.50

$
8.36

Drive-through sales as a percentage of total sales
 
53.9
%
52.8
%
52.6
%
Day-part sales percentages:
 
 
 
 
Breakfast
 
19.8
%
18.8
%
18.1
%
Lunch
 
22.5
%
22.6
%
22.7
%
Dinner
 
25.8
%
26.1
%
26.3
%
Late night (9pm to midnight)
 
12.4
%
12.6
%
12.8
%
Afternoon (2pm to 5pm)
 
12.5
%
12.4
%
12.2
%
Overnight (midnight to 6am)
 
7.0
%
7.5
%
7.9
%
(1) Average annual sales for company-owned restaurants are derived by dividing restaurant sales for such year for the applicable segment by the average number of company-owned restaurants for the applicable segment for such year.
Restaurant Site Selection and Capital Costs
We believe that the location of our restaurants is a critical component of each restaurant’s success. We evaluate potential new sites on many critical criteria including accessibility, visibility, costs, surrounding traffic patterns, competition and demographic characteristics. Our senior management team determines the acceptability of all new sites, based upon analyses prepared by our real estate, financial and operations professionals as well as a third party vendor that employs proprietary location research technology and performs site evaluations on our behalf. Historically, this process has resulted in either acquisition of the land or entering into a long-term lease for the land, in either case followed by construction of the building using cash generated from our operations or with borrowings under our senior credit facility. If we acquire the land, we may consider seeking to include the land and building in a sale and leaseback arrangement as a form of financing in order to reinvest the proceeds in additional restaurants.
The following table includes the historical initial interior cost (including equipment, seating, signage and other interior costs) of a typical new or converted free-standing restaurant, as well as the historical exterior cost (including building and site improvements) and land if acquired.
 
 
Pollo Tropical
 
Taco Cabana
Interior costs and signage
 
$650,000 to $750,000
 
$475,000 to $525,000
Exterior costs
 
$0.8 million to $1.3 million
 
$1.1 million to $1.2 million
Land
 
$0.9 million to $1.4 million
 
$1.0 million to $1.3 million
The cost of securing real estate and building and equipping new restaurants can vary significantly and depends on a number of factors, including the local economic conditions, geographic considerations and the characteristics of a particular site. Accordingly, the cost of opening new restaurants in the future may differ substantially from the historical cost of restaurants previously opened.

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Seasonality
Our business is moderately seasonal due to regional weather conditions. Sales from our Pollo Tropical restaurants (primarily located in south and central Florida) are generally higher during the winter months than during the summer months. Sales from our Taco Cabana restaurants (located in primarily in Texas) are generally higher during the summer months than during the winter months. Accordingly, we believe this seasonal impact is not material to our business as a whole because of the offsetting seasonality of our concepts.
Restaurant Locations
As of December 28, 2014, we owned and operated 124 Pollo Tropical restaurants, of which 107 were located in Florida, ten were located in Texas, five were located in Georgia and two were located in Tennessee. In addition we franchised 37 Pollo Tropical restaurants as of December 28, 2014, comprised of 17 in Puerto Rico, one in Ecuador, one in Honduras, one in the Bahamas, two in Trinidad & Tobago, two in Venezuela, five in Panama, one in the Dominican Republic, two in Guatemala, and five on college campuses in Florida.
As of December 28, 2014, we owned and operated 167 Taco Cabana restaurants, of which 162 were located in Texas, three were located in Oklahoma and, under the elevated non-24 hour Taco Cabana format, Cabana Grill, one was located in Georgia and one was located in Florida. In addition, as of December 28, 2014, we franchised four Taco Cabana restaurants in New Mexico and licensed three non-traditional locations in Texas.
Operations
Management Structure
We conduct substantially all of our marketing and operations support functions from our Pollo Tropical division headquarters in Miami, Florida, and our Taco Cabana division headquarters in San Antonio, Texas. The management structure for Pollo Tropical consists of our Chief Operating Officer, Daniel Meisenheimer, who has over 25 years of experience in the restaurant industry, and a Vice President of Operations supported by four Regional Directors, a Senior District Manager, 18 District Managers and four Assistant District Managers. The management structure of Taco Cabana consists of our Chief Operating Officer, Todd Coerver, who has over 20 years of restaurant industry experience, and a Vice President of Operations supported by two Regional Directors, three Senior District Managers and 25 District Managers. The two Chief Operating Officers report to our Chief Executive Officer and President, and are supported by a number of divisional and corporate executives with responsibility for operations, marketing, product development, purchasing, real estate and finance. For each of our brands, a district manager is responsible for the direct oversight of the day-to-day operations of an average of approximately seven restaurants. Typically, district managers have previously served as restaurant managers at one of our restaurants. Regional directors, district managers and restaurant managers are compensated with a fixed salary plus an incentive bonus based upon the performance of the restaurants under their supervision. Typically, our restaurants are staffed with hourly employees who are supervised by a salaried manager and two or three salaried assistant managers.
Our executive management functions are primarily conducted from our corporate headquarters in Addison, Texas. Our management team is led by Timothy P. Taft, who serves as our Chief Executive Officer and President. Lynn Schweinfurth serves as our Chief Financial Officer, Joseph A. Zirkman serves as the Senior Vice President, General Counsel and Secretary, John Todd serves as our Chief Development Officer and Joseph W. Brink serves as our Vice President, Supply Chain Management.
Training
We maintain a comprehensive training and development program for all of our restaurant personnel and provide both classroom and in-restaurant training for our salaried and hourly personnel. The program emphasizes system-wide operating procedures, food preparation methods and guest service standards for each of the concepts.
Management Information Systems
Our management information systems provide us the ability to efficiently and effectively manage our restaurants and to ensure consistent application of operating controls at our restaurants.
In both our Taco Cabana and Pollo Tropical restaurants, we use touch-screen point-of-sale (POS) systems which are designed to facilitate accuracy and speed of order taking, to be user-friendly, to require limited cashier training and to improve speed-of-service through the use of conversational order-taking techniques. The POS systems are integrated with PC-based applications at the restaurant that are designed to facilitate financial and management control of our restaurant operations.
These restaurant systems provide daily tracking and reporting of traffic counts, menu item sales, labor and food data including costs, and other key operating information for each restaurant. These systems also provide the ability to:

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monitor labor utilization and sales trends on a real-time basis at each restaurant, enabling the restaurant manager to effectively manage our established labor standards on a timely basis;
reduce inventory shrinkage using restaurant-level inventory management and centralized standard costing systems;
analyze sales and product mix data to help restaurant managers forecast production levels;
monitor day-part drive-thru speed of service at each of the restaurants;
systematically communicate human resource and payroll data for efficient centralized management of labor costs and payroll processing;
employ centralized control over price, menu and inventory management activities at the restaurant utilizing the remote management capabilities of our systems;
take advantage of electronic commerce including the ability to place orders with suppliers and to integrate detailed invoice, receiving and product data with our inventory and accounting systems; and
provide analyses, reporting and tools to enable all levels of management to review a wide-range of financial, product mix and operational data.
Critical information from such systems is available in near real-time to our restaurant managers, who are expected to react quickly to trends or situations in their restaurant. Our district managers also receive near real-time information from all restaurants under their control and have access to key operating data on a remote basis. Management personnel at all levels, from the restaurant manager through senior management, utilize key restaurant performance indicators to manage our business.
Advertising and Promotion
We believe Pollo Tropical and Taco Cabana are among the most highly recognized fast-casual restaurant brands in their respective primary markets of Florida and Texas. Pollo Tropical and Taco Cabana utilize an integrated, multi-level marketing approach that includes periodic chain-wide promotions, direct mail, in-store promotions, local store marketing, social media marketing and web-based and other strategies, including the use of radio and television advertising and limited-time offer menu item promotions. As a percentage of Pollo Tropical restaurant sales, Pollo Tropical’s advertising expenditures were 2.5% in 2014, 2.2% in 2013 and 2.5% in 2012. As a percentage of Taco Cabana restaurant sales, Taco Cabana’s advertising expenditures were 3.9% in 2014, 3.9% in 2013 and 4.0% in 2012.
Suppliers and Distributors
For our Pollo Tropical and Taco Cabana restaurants, we have negotiated directly with local and national suppliers for the purchase of food and beverage products and supplies to ensure consistent quality and freshness and to obtain competitive prices. Food and supplies for both brands are ordered from approved suppliers and are shipped via distributors to the restaurants. Both brands are responsible for monitoring quality control and supervision of these suppliers and conducting inspections to observe the preparation and insure the quality of products purchased.
For both our Pollo Tropical and Taco Cabana restaurants, we have long-term service agreements with our primary distributors of food and paper products. We negotiate directly with local and national suppliers for the purchase of food and beverage products and supplies. Our restaurants’ food and supplies are ordered from approved suppliers and are shipped via distributors to the restaurants. In 2014, we consolidated all of our food distribution with Performance Food Group, Inc., which is now our primary distributor of food and beverage products and supplies for both our Pollo Tropical and Taco Cabana restaurants under a distribution services agreement that expires on July 26, 2019, while Kelly Food Service is our primary distributor for chicken for our Pollo Tropical locations in the Southeast under an agreement that expires on December 31, 2017. We also currently rely on five suppliers for chicken for our Pollo Tropical restaurants under agreements that expire on December 31, 2015.
Quality Assurance
At each of our two concepts, our operational focus is closely monitored to achieve a high level of guest satisfaction via speed of service, order accuracy and quality of service. Our senior management and restaurant management staffs are principally responsible for ensuring compliance with our operating policies. We have uniform operating standards and specifications relating to the quality, preparation and selection of menu items, maintenance and cleanliness of the restaurants and employee conduct. In order to maintain compliance with these operating standards and specifications, we distribute to our restaurant operations management team detailed reports measuring compliance with various guest service standards and objectives, including feedback obtained directly from our guests. The guest feedback is monitored by an independent agency and by us and consists of evaluations of speed of service, quality of service, quality of our menu items and other operational objectives including the cleanliness of our restaurants. We also have our own in-house guest service representatives that handle guest inquiries and complaints.

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We operate in accordance with quality assurance and health standards mandated by federal, state and local governmental laws and regulations. These standards include food preparation rules regarding, among other things, minimum cooking times and temperatures, maximum time standards for holding prepared food, food handling guidelines and cleanliness. To maintain these standards, we conduct unscheduled inspections of our restaurants. In addition, restaurant managers conduct internal inspections for taste, quality, cleanliness and food safety on a regular basis.
Trademarks
We believe that our trade names and logos for our brands are important to our success. We have registered the principal Pollo Tropical, Taco Cabana and Cabana Grill logos and designs with the U.S. Patent and Trademark Office on the Principal Register as a service mark for our restaurant services. We also have secured or have applied for state and federal registrations for several other advertising or promotional marks, including variations of the Pollo Tropical, Taco Cabana and Cabana Grill principal marks as well as those related to our core menu offerings. In connection with our current and potential international franchising activities, we have applied for or been granted registrations in foreign countries of the Pollo Tropical and Taco Cabana principal marks and several other marks. Although our policy is to protect and defend vigorously our rights to intellectual property, we may not be able to adequately protect our intellectual property, which could hurt the value of our brand and adversely affect our business. In certain foreign countries, we have been involved in trademark opposition proceedings to defend our rights to register certain trademarks. In that regard, we have discovered that an individual unaffiliated with us has registered, without our knowledge, authorization or consent, a trademark in Spain and the European Community for a name and logo virtually identical to the Pollo Tropical name and logo. We have pursued various legal actions to invalidate this individual's rights to our marks, and although we have not been successful to date, we intend to continue to pursue all necessary legal action to invalidate these rights or otherwise protect our marks. Although we believe we will ultimately be successful, there can be no assurance in this regard.
Other than the Pollo Tropical, Taco Cabana, and Cabana Grill trademarks and the logo and trademark of Fiesta Restaurant Group (including Internet domain names and addresses) and proprietary rights relating to certain of our core menu offerings, we have no proprietary intellectual property.
Government Regulation
Various federal, state and local laws affect our business, including various health, sanitation, fire and safety standards. Restaurants to be constructed or reimaged are subject to state and local building code and zoning requirements. In connection with the development and reimaging of our restaurants, we may incur costs to meet certain federal, state and local regulations, including regulations promulgated under the Americans with Disabilities Act.
We are subject to the federal Fair Labor Standards Act and various other federal and state laws governing such matters as:
minimum wage and other compensation requirements;
health care;
insurance and workers' compensation rules;
anti-discrimination laws;
requirements to provide meal and rest periods or other benefits;
family leave requirements;
unemployment compensation;
requirements regarding working conditions and accommodation for certain employees; and
citizenship requirements.
A significant number of our food service personnel are paid at rates related to the federal, and where applicable, state minimum wage and, accordingly, increases in the minimum wage have increased and in the future will increase wage rates at our restaurants.
Certain provisions of the comprehensive federal health care reform law enacted in 2010 became effective in 2015. We believe that a combination of labor management, cost management and menu price increases can offset all of the potential increased costs associated with these regulations for 2015.
We are also subject to various federal, state and local environmental laws, rules and regulations. We believe that we conduct our operations in substantial compliance with applicable environmental laws and regulations. Our costs for compliance with environmental laws or regulations have not had a material adverse effect on our results of operations, cash flows or financial condition in the past.

13


Taco Cabana and Pollo Tropical are subject to alcoholic beverage control regulations that require state, county or municipal licenses or permits to sell alcoholic beverages at each restaurant location that sells alcoholic beverages. Typically, licenses must be renewed annually and may be revoked or suspended for cause at any time. Licensing entities, authorized with law enforcement authority, may issue violations and conduct audits and investigations of the restaurant’s records and procedures. Alcoholic beverage control regulations relate to numerous aspects of the daily operations of our Taco Cabana restaurants and certain of our Pollo Tropical restaurants, including minimum age for consumption, certification requirements for employees, hours of operation, advertising, wholesale purchasing, inventory control and handling, storage and dispensing of alcoholic beverages. These regulations also prescribe certain required banking and accounting practices related to alcohol sales and purchasing.
Our Taco Cabana restaurants and certain of our Pollo Tropical restaurants are subject to state “dram-shop” laws. Dram-shop laws provide a person injured by an intoxicated person the right to recover damages from an establishment that wrongfully served alcoholic beverages to the intoxicated or minor patron. We have specific insurance that covers claims arising under dram-shop laws. However, we cannot assure you that this insurance will be adequate to cover any claims that may be instituted against us.
With respect to the franchising of Pollo Tropical and Taco Cabana restaurants, we are subject to franchise and related regulations in the U.S. and certain foreign jurisdictions where we offer and sell franchises. These regulations include obligations to provide disclosure about our two concepts, the franchise agreements and the franchise system as well as other organizational and financial information relating to our two concepts. The regulations also include obligations to register certain franchise documents in the U.S. and foreign jurisdictions, and obligations to disclose the substantive relationship between the parties to the agreements.
Competition
The restaurant industry is highly competitive with respect to price, service, location and food quality. In each of our markets, our restaurants compete with a large number of national and regional restaurant chains, as well as locally owned restaurants, offering low and medium-priced fare. We also compete with convenience stores, delicatessens and prepared food counters in supermarkets, grocery stores, cafeterias and other purveyors of moderately priced and quickly prepared foods.
We believe that:
product quality and taste;
brand differentiation and recognition;
convenience of location;
speed of service;
menu variety;
price; and
ambiance
are among the most important competitive factors in the fast-casual restaurant segment and that our two concepts effectively compete in that category.
Pollo Tropical’s competitors include national and regional chicken-based concepts, as well as other types of quick-service and fast-casual restaurants.
Taco Cabana’s restaurants, although part of the fast-casual segment of the restaurant industry, compete with quick-service restaurants, including those in the quick-service Mexican segment, other fast-casual restaurants and traditional casual dining Mexican restaurants.
Employees
As of December 28, 2014, we employed approximately 10,600 persons, of which approximately 190 were administrative personnel and approximately 10,410 were restaurant operations and other supervisory personnel. None of our employees are covered by collective bargaining agreements. We believe that overall relations with our employees are good.
Availability of Information
We file annual, quarterly and current reports and other information with the Securities and Exchange Commission (the “SEC”). The public may read and copy any materials we file with the SEC at the SEC's Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC

14


at 1 800-SEC-0330. The SEC also maintains an Internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC. The address of that site is http://www.sec.gov.
We make available through our internet website (www.frgi.com) our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after electronically filing such material with the SEC. The reference to our website address is a textual reference only, meaning that it does not constitute incorporation by reference of the information contained on the website and should not be considered part of this document. In addition, at our website you may also obtain, free of charge, copies of our corporate governance materials, including the charters for the committees of our Board of Directors and copies of various corporate policies including our Code of Business Ethics and Conduct, Code of Ethics for Executives and our "Whistle Blower" policy.
ITEM  1A.
RISK FACTORS
You should carefully consider the risks described below, as well as other information and data included in this Annual Report on Form 10-K. Any of the following risks, as well as additional risks and uncertainties not currently known to us, could materially adversely affect our business, consolidated financial condition or results of operations and could also adversely affect the trading price of our common stock.
Risks Related to Our Business
Intense competition in the restaurant industry could make it more difficult to expand our business and could also have a negative impact on our operating results if guests favor our competitors or we are forced to change our pricing and other marketing strategies.
The restaurant industry is highly competitive. In each of our markets, our restaurants compete with a large number of national and regional restaurant chains, as well as locally owned restaurants, offering low and medium-priced fare. We also compete with convenience stores, delicatessens and prepared food counters in grocery stores, supermarkets, cafeterias and other purveyors of moderately priced and quickly prepared food.
Pollo Tropical's competitors include national and regional chicken-based concepts as well as other types of quick-service and fast-casual restaurants. Our Taco Cabana restaurants compete with quick-service restaurants, including those in the quick-service Mexican segment, other fast-casual restaurants and traditional casual dining Mexican restaurants.
To remain competitive, we, as well as certain of the other major fast-casual chains, have increasingly offered selected food items and combination meals at discounted prices. These pricing and other marketing strategies have had, and in the future may have, a negative impact on our sales and earnings.
Factors applicable to the fast-casual restaurant segment may adversely affect our results of operations, which may cause a decrease in earnings and revenues.
The fast-casual restaurant segment is highly competitive and can be materially adversely affected by many factors, including:
changes in local, regional or national economic conditions;
changes in demographic trends;
changes in consumer tastes;
changes in traffic patterns;
increases in fuel prices and utility costs;
consumer concerns about health, diet and nutrition;
increases in the number of, and particular locations of, competing restaurants;
changes in discretionary consumer spending;
inflation;
increases in the cost of commodities, such as beef, chicken and produce as well as the cost of paper goods and packaging;
increased labor costs, including unemployment insurance, minimum wage requirements, and increases in the cost of providing healthcare, including the impact of the Affordable Care Act;
costs related to remaining competitive and current with regard to new technologies in our restaurants such as on-line ordering and credit card security;
the availability of experienced management and hourly-paid employees; and

15


regional weather conditions.  
 Our continued growth depends on our ability to open and operate new restaurants profitably, which in turn depends on our continued access to capital, and newly developed restaurants may not perform as we expect and we cannot assure you that our growth and development plans will be achieved.
Our continued growth depends on our ability to develop additional Pollo Tropical and Taco Cabana restaurants. Development involves substantial risks, including the following:
the inability to fund development;
development costs that exceed budgeted amounts;
delays in completion of construction;
the inability to obtain all necessary zoning and construction permits;
the inability to identify, or the unavailability of, suitable sites on acceptable leasing or purchase terms;
developed restaurants that do not achieve desired revenue or cash flow levels or other operating and performance targets once opened;
incurring substantial unrecoverable costs in the event a development project is abandoned prior to completion or a new restaurant is closed due to poor financial performance;
the inability to recruit and retain managers and other employees necessary to staff each new restaurant;
changes in or interpretations of governmental rules and regulations; and
changes in general economic and business conditions.
We cannot assure you that our growth and development plans can be achieved. Our long-term development plans will require additional management, operational and financial resources. For example, we will be required to recruit managers and other personnel for each new restaurant. We cannot assure you that we will be able to manage our expanding operations effectively and our failure to do so could adversely affect our results of operations. In addition, our ability to open new restaurants and to grow, as well as our ability to meet other anticipated capital needs, may depend on our continued access to external financing, including borrowing under our senior secured revolving credit facility, which we refer to as the "senior credit facility". We cannot assure you that we will have access to the capital we need at acceptable terms or at all, which could materially adversely affect our business. In addition, our need to manage our indebtedness levels to ensure continued compliance with financial leverage ratio covenants under our senior credit facility may reduce our ability to develop new restaurants.
Additionally, we may encounter difficulties developing restaurants outside of our existing markets. We cannot assure you that we will be able to successfully grow our market presence beyond our existing markets, as we may encounter well-established competitors in new areas. In addition, we may be unable to find attractive locations or successfully market our products as we attempt to expand beyond our existing markets, as the competitive circumstances and consumer characteristics in these new areas may differ substantially from those in areas in which we currently operate. We may also not open a sufficient number of restaurants in new markets to adequately leverage distribution, supervision and marketing costs. As a result of the foregoing, we cannot assure you that we will be able to successfully or profitably operate our new restaurants outside our existing markets. In addition, there can be no assurance that we will achieve our operating and performance targets at every new company-owned restaurant opened in existing or new markets.
Our expansion into new markets may present increased risks due to a lack of market awareness of our brands.
Some of our new restaurants are and will be located in areas where there is a limited or a lack of market awareness of the Pollo Tropical, Taco Cabana or Cabana Grill brand and therefore it may be more challenging for us to attract guests to our restaurants. Restaurants opened in new markets where we have not reached media efficiency may open at lower sales volumes than restaurants opened in existing media-efficient markets, and may have lower restaurant-level operating margins than in existing markets. Sales at restaurants opened in new markets that are not yet media efficient may take longer to reach average restaurant volumes, if at all, thereby adversely affecting our operating results, including the recognition of future impairment and other lease charges. Opening new restaurants in areas in which potential guests may not be familiar with our restaurants may include costs related to the opening and marketing of those restaurants that are substantially greater than those incurred by our restaurants in other areas. Even though we may incur substantial additional costs with respect to these new restaurants, they may attract fewer guests than our more established restaurants in existing markets.
We could be adversely affected by food-borne illnesses, as well as widespread negative publicity regarding food quality, illness, injury or other health concerns.
Negative publicity about food quality, illness, injury or other health concerns (including health implications of obesity) or similar issues stemming from one restaurant or a number of restaurants could materially adversely affect us, regardless of

16


whether they pertain to our own restaurants, restaurants operated by our franchisees or to restaurants owned or operated by other companies. For example, health concerns about the consumption of beef or chicken or by specific events such as the outbreak of “mad cow” disease or “avian” flu could lead to changes in consumer preferences, reduce consumption of our products and adversely affect our financial performance. These events could also reduce the available supply of beef or chicken or significantly raise the price of beef or chicken.
In addition, we cannot guarantee that our operational controls and employee training will be effective in preventing food-borne illnesses, food tampering and other food safety issues that may affect our restaurants. Food-borne illness or food tampering incidents could be caused by guests, employees, food suppliers or distributors and, therefore, could be outside of our control. Any publicity relating to health concerns or the perceived or specific outbreaks of food-borne illnesses, food tampering or other food safety issues attributed to one or more of our restaurants, could result in a significant decrease in guest traffic in all of our restaurants and could have a material adverse effect on our results of operations. In addition, similar publicity or occurrences with respect to other restaurants or restaurant chains could also decrease our guest traffic and have a similar material adverse effect on our business.
We may incur significant liability or reputational harm if claims are brought against us or against our franchisees.
We or our franchisees may be subject to complaints, regulatory proceedings or litigation from guests or other persons alleging food-related illness, injuries suffered on our premises or other food quality, health or operational concerns, including environmental claims. In addition, in recent years a number of restaurant companies have been subject to lawsuits, including class action lawsuits, alleging, among other things, violations of federal and state law regarding workplace and employment matters, discrimination, harassment, wrongful termination and wage, rest break, meal break and overtime compensation issues and, in the case of quick-service restaurants, alleging that they have failed to disclose the health risks associated with high-fat or high sodium foods and that their marketing practices have encouraged obesity. We may also be subject to litigation or other actions initiated by governmental authorities, our employees and our franchisees, among others, based upon these and other matters. Adverse publicity resulting from such allegations or occurrences or alleged discrimination or other operating issues stemming from one of our locations, a number of our locations or our franchisees could adversely affect our business, regardless of whether the allegations are true, or whether we are ultimately held liable. Any cases filed against us could materially adversely affect us if we lose such cases and have to pay substantial damages or if we settle such cases. In addition, any such cases may materially and adversely affect our operations by increasing our litigation costs and diverting our attention and resources to address such actions. In addition, if a claim is successful, our insurance coverage may not cover or be adequate to cover all liabilities or losses and we may not be able to continue to maintain such insurance, or to obtain comparable insurance at a reasonable cost, if at all. If we suffer losses, liabilities or loss of income in excess of our insurance coverage or if our insurance does not cover such loss, liability or loss of income, there could be a material adverse effect on our results of operations.
Our franchisees could take actions that harm our reputation.
As of December 28, 2014, a total of 44 Pollo Tropical and Taco Cabana restaurants were owned and operated by our franchisees. We do not exercise control of the day-to-day operations of our franchisees. We expect our number of franchised restaurants to increase in the future as a result of our franchising strategy for Pollo Tropical and our strategy of expanding domestic non-traditional licensing for both Pollo Tropical and Taco Cabana. While we attempt to ensure that franchisee-owned restaurants maintain the same high operating standards as our company-owned restaurants, one or more of these franchisees may fail to meet these standards. Any shortcomings at our franchisee-owned restaurants could be attributed to our company as a whole and could adversely affect our reputation and damage our brands.
Changes in consumer tastes could negatively impact our business.
We obtain a significant portion of our revenues from the sale of foods that are characterized as Caribbean and Mexican and if consumer preferences for these types of foods change, it could have a material adverse effect on our operating results. The fast-casual segment is characterized by the frequent introduction of new products, often accompanied by substantial promotional campaigns and are subject to changing consumer preferences, tastes, and eating and purchasing habits. Our success depends on our ability to anticipate and respond to changing consumer preferences, tastes and dining and purchasing habits, as well as other factors affecting the restaurant industry, including new market entrants and demographic changes. We may be forced to make changes to our menu items in order to respond to changes in consumer tastes or dining patterns, and we may lose guests who do not prefer the new menu items. In recent years, numerous companies in the fast-casual segment have introduced products positioned to capitalize on the growing consumer preference for food products that are, or are perceived to be, promoting good health, nutritious, low in calories and low in fat content. If we do not continually develop and successfully introduce new menu offerings that appeal to changing consumer preferences or if we do not timely capitalize on new products, our operating results could suffer. In addition, any significant event that adversely affects consumption of our products, such as cost, changing tastes or health concerns, could adversely affect our financial performance.

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An increase in food costs could adversely affect our operating results.
Our profitability and operating margins are dependent in part on our ability to anticipate and react to changes in food costs. Changes in the availability of certain food products or price could affect our ability to offer a broad menu and price offering to guests and could materially adversely affect our profitability and reputation. In 2014, higher commodity costs increased cost of sales for our Pollo Tropical restaurants by 0.2%, as a percentage of Pollo Tropical restaurant sales. Higher commodity costs also increased cost of sales in 2014 for our Taco Cabana restaurants by 0.9%, as a percentage of Taco Cabana restaurant sales. We anticipate that overall commodity costs will increase in 2015 as compared to 2014, in particular related to the specific type and size of chicken utilized by our Pollo Tropical restaurants. However, we believe commodity price increases in 2015 will be mitigated through menu price increases and other initiatives, although there can be no assurance in such regard. The type, variety, quality and price of produce, beef, poultry, cheese and other commodities can be subject to change and to factors beyond our control, including weather, governmental regulation, availability and seasonality, each of which may affect our food costs or cause a disruption in our supply. Our food distributors or suppliers also may be affected by higher costs to produce and transport commodities used in our restaurants, including higher minimum wage and benefit costs and other expenses that they pass through to their customers, which could result in higher costs for goods and services supplied to us. Although we utilize purchasing contracts of up to a year to lock in the prices for a material portion of the food commodities used in our restaurants, some of the commodities used in our operations cannot be locked in for periods of longer than one month. Currently, we have contracts of varying lengths with several of our distributors and suppliers, including our distributors and suppliers of poultry and beef. We do not use financial instruments to hedge our risk against market fluctuations in the price of commodities at this time. We may not be able to anticipate and react to changing food costs (including anticipated increases in food costs in 2015) through our purchasing practices and menu price adjustments in the future, and failure to do so could negatively impact our revenues and results of operations.
If a significant disruption in service or supply by any of our suppliers or distributors were to occur, it could create disruptions in the operations of our restaurants, which could have a material adverse effect on our business.
Our financial performance is dependent on our continuing ability to offer fresh, quality food at competitive prices. If a significant disruption in service or supply by our suppliers or distributors were to occur, it could create disruptions in the operations of our restaurants, which could have a material adverse effect on us.
We negotiate directly with local and national suppliers for the purchase of food and beverage products and supplies. Our restaurants’ food and supplies are ordered from approved suppliers and are shipped via distributors to the restaurants. In 2014, we consolidated all of our food distribution with Performance Food Group, Inc., which is now our primary distributor of food and beverage products and supplies for both our Pollo Tropical and Taco Cabana restaurants under a distribution services agreement that expires on July 26, 2019, while Kelly Food Service is our primary distributor for chicken for our Pollo Tropical locations in the Southeast under an agreement that expires on December 31, 2017. We also currently rely on five suppliers for chicken for our Pollo Tropical restaurants under agreements that expire on December 31, 2015. If our distributors or suppliers were unable to service us, this could lead to a material disruption of service or supply until a new distributor or supplier is engaged, which could have a material adverse effect on our business.
If labor costs increase, we may not be able to make a corresponding increase in our prices and our operating results may be adversely affected.
Wage rates for a substantial number of our employees are above the federal and or state minimum wage rates. As federal and/or state minimum wage rates increase, we may need to increase not only the wage rates of our minimum wage employees but also the wages paid to the employees at wage rates which are above the minimum wage, which will increase our costs. To the extent that we are not able to raise our prices to compensate for increases in wage rates, including increases in state unemployment insurance costs or other costs including mandated health insurance, this could have a material adverse effect on our operating results. In addition, even if minimum wage rates do not increase, we may still be required to raise wage rates in order to compete for an adequate supply of labor for our restaurants.
The efficiency and quality of our competitors' advertising and promotional programs and the extent and cost of our advertising could have a material adverse effect on our results of operations and financial condition.
If our competitors increase spending on advertising and promotions, or the cost of television or radio advertising increases, or our advertising and promotions are less effective than our competitors, there could be a material adverse effect on our results of operations and financial condition.
Our business is regional and we therefore face risks related to reliance on certain markets as well as risks for other unforeseen events.
As of December 28, 2014, excluding our franchised locations, all but seven of our Pollo Tropical restaurants were located in Florida and Texas and all but five of our Taco Cabana restaurants were located in Texas. Therefore, the economic conditions, state and local government regulations, weather conditions or other conditions affecting Florida and Texas, the tourism industry

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affecting Florida and other unforeseen events, including war, terrorism and other international conflicts may have a material impact on the success of our restaurants in those locations.
Many of our restaurants are located in regions that may be susceptible to severe weather conditions. As a result, adverse weather conditions in any of these areas could damage these restaurants, result in fewer guest visits to these restaurants and otherwise have a material adverse impact on our business. For example, our Florida and certain of our Texas restaurants are susceptible to hurricanes and other severe tropical weather events, and in the past, a number of our Taco Cabana restaurants have been periodically affected by severe winter weather.
Economic downturns may adversely impact consumer spending patterns.
Our business is dependent to a significant extent on national, regional and local economic conditions, particularly those that affect our guests that frequently patronize our restaurants. In particular, where our guests’ disposable income is reduced (such as by job losses, credit constraints and higher housing, tax, energy, interest or other costs) or where the perceived wealth of guests has decreased (because of circumstances such as lower residential real estate values, increased foreclosure rates, increased tax rates or other economic disruptions), our restaurants have in the past experienced, and may in the future experience, lower sales and guest traffic as guests choose lower-cost alternatives or choose alternatives to dining out. The resulting decrease in our guest traffic or average sales per transaction has had an adverse effect in the past, and could in the future have a material adverse effect, on our business.
We cannot assure you that the current locations of our existing restaurants will continue to be economically viable or that additional locations will be acquired at reasonable costs.
The location of our restaurants has significant influence on their success. We cannot assure you that current locations will continue to be economically viable or that additional locations can be acquired at reasonable costs. In addition, the economic environment where restaurants are located could decline in the future, which could result in reduced sales in those locations. We cannot assure you that new sites will be profitable or as profitable as existing sites.
Government regulation could adversely affect our financial condition and results of operations.
We are subject to extensive laws and regulations relating to the development and operation of restaurants, including regulations relating to the following:
health care;
requirements relating to labeling of caloric and other nutritional information on menu boards, advertising and food packaging;
the preparation and sale of food;
liquor licenses which allow us to serve alcoholic beverages at our Taco Cabana restaurants and at certain Pollo Tropical restaurants;
employer/employee relationships, including minimum wage requirements, overtime, working and safety conditions, and citizenship requirements;
zoning;
federal and state laws that prohibit discrimination and laws regulating design and operation of, and access to, facilities, such as the Americans With Disabilities Act of 1990; and
federal and state regulations governing the operations of franchises, including rules promulgated by the Federal Trade Commission.
In the event that legislation having a negative impact on our business is adopted, it could have a material adverse impact on us. For example, substantial increases in the minimum wage or state or Federal unemployment taxes could adversely affect our financial condition and results of operations. Local zoning or building codes or regulations and liquor license approvals can cause substantial delays in our ability to build and open new restaurants. Local authorities may revoke, suspend or deny renewal of our liquor licenses if they determine that our conduct violates applicable regulations. Any failure to obtain and maintain required licenses, permits and approvals could adversely affect our operating results.
The effect of recent changes to U.S. health care laws may increase our health care costs and negatively impact our financial results.
Under the comprehensive U.S. health care reform law enacted in 2010, the Affordable Care Act, changes that became effective in 2014, and the employer mandate and employer penalties that become effective in 2015, may increase our labor costs significantly. While changes in the law for 2014, including the imposition of a penalty on individuals who do not obtain health care coverage, have not resulted in significant numbers of additional employees electing to participate in our health care plans, there can be no assurance that this will not change in the future which may increase our health care costs. It is also possible

19


that making changes or failing to make changes in the health care plans we offer will make us less attractive to our current or potential employees. The costs and other effects of these new health care requirements on future periods cannot be determined with certainty and could have a material adverse effect on our results of operations.
Security breaches of confidential guest information in connection with our electronic processing of credit and debit card transactions or security breaches of confidential employee information may adversely affect our business.
A significant amount of our restaurant sales are by credit or debit cards. Other restaurants and retailers have experienced security breaches in which credit and debit card information of their guests has been stolen. We may in the future become subject to lawsuits or other proceedings for purportedly fraudulent transactions arising out of the actual or alleged theft of our guests’ credit or debit card information. Any such claim or proceeding, or any adverse publicity resulting from these allegations, may have a material adverse effect on us and our restaurants.
We also collect and maintain personal information about our employees and customers as part of some of our marketing programs. The collection and use of such information is regulated at the federal and state levels, and the regulatory environment related to information security and privacy is increasingly demanding. We also rely increasingly on cloud computing and other technologies that result in third parties holding significant amounts of customer or employee information on our behalf. If the security and information systems of our outsourced third party providers we use to store or process such information are compromised or if we or such third parties otherwise fail to comply with these laws and regulations, we could face litigation and the imposition of penalties, which could adversely affect our financial performance. Our reputation as a brand or as an employer could also be adversely affected, which could impair our sales or ability to attract and keep qualified employees.
Our indebtedness could adversely affect our financial condition.
As of December 28, 2014, we had $69.0 million of outstanding indebtedness comprised of $66.0 million of revolving credit borrowings under our senior credit facility, lease financing obligations of $1.7 million and capital lease obligations of $1.3 million.
As a result of our indebtedness, a portion of our cash flow will be required to make payments on our outstanding indebtedness. In addition, to the extent we significantly increase our borrowings and interest rates increase under our senior credit facility, we may not generate sufficient cash flow from operations to enable us to both repay our indebtedness and fund our other liquidity needs.
 Our indebtedness could have important consequences to you. For example, it could:
make it more difficult for us to satisfy our obligations with respect to our debt;
increase our vulnerability to general adverse economic and industry conditions;
require us to dedicate a portion of our cash flow from operations to payments on our indebtedness and related interest, including indebtedness we may incur in the future, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general corporate purposes;
limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
increase our cost of borrowing;
place us at a competitive disadvantage compared to our competitors that may have less debt; and
limit our ability to obtain additional financing for working capital, capital expenditures, acquisitions, debt service requirements or general corporate purposes.
We expect to use cash flow from operations to meet our current and future financial obligations, including funding our operations, debt service and capital expenditures. Our ability to make these payments depends on our future performance, which will be affected by financial, business, economic and other factors, many of which we cannot control. Our business may not generate sufficient cash flow from operations in the future, which could result in our being unable to repay indebtedness, or to fund other liquidity needs. If we do not have enough money, we may be forced to reduce or delay our business activities and capital expenditures, sell assets, obtain additional debt or equity capital or restructure or refinance all or a portion of our debt, including our senior credit facility, on or before maturity. We cannot make any assurances that we will be able to accomplish any of these alternatives on terms acceptable to us, or at all. In addition, the terms of existing or future indebtedness, including the agreements for our senior credit facility, may limit our ability to pursue any of these alternatives.
Despite current indebtedness levels and restrictive covenants, we may still be able to incur more debt or make certain restricted payments, which could further exacerbate the risks described above.
We and our subsidiaries may be able to incur additional debt in the future. Although our senior credit facility contains restrictions on our ability to incur indebtedness, those restrictions are subject to a number of exceptions. We may also consider investments in joint ventures or acquisitions, which may increase our indebtedness. Moreover, although our senior credit

20


facility contains restrictions on our ability to make restricted payments, including the declaration and payment of dividends, we are able to make such restricted payments under certain circumstances. Adding new debt to current debt levels or making restricted payments could intensify the related risks that we and our subsidiaries now face.
Our senior credit facility restricts our ability to engage in some business and financial transactions.
Our senior credit facility restricts our ability in certain circumstances to, among other things:
incur additional debt;
pay dividends and make other distributions on, redeem or repurchase, capital stock;
make investments or other restricted payments;
enter into transactions with affiliates;
sell all, or substantially all, of our assets;
create liens on assets to secure debt; or
effect a consolidation or merger.
These covenants limit our operational flexibility and could prevent us from taking advantage of business opportunities as they arise, growing our business or competing effectively. In addition, our senior credit facility requires us to maintain specified financial ratios and satisfy other financial condition tests. Our ability to meet these financial ratios and tests can be affected by events beyond our control, and we cannot assure you that we will meet these tests.
If one of our employees sells alcoholic beverages to an intoxicated patron, we may be liable to third parties for the acts of the patron.
We serve alcoholic beverages at our Taco Cabana restaurants and at some of our Pollo Tropical restaurant locations and are subject to the “dram-shop” statutes of the jurisdictions in which we serve alcoholic beverages. “Dram-shop” statutes generally provide that serving alcohol to an intoxicated patron is a violation of the law.
In most jurisdictions, if one of our employees sells alcoholic beverages to an intoxicated patron we may be liable to third parties for the acts of the patron. We cannot guarantee that those patrons will not be served or that we will not be subject to liability for their acts. Our liquor liability insurance coverage may not be adequate to cover any potential liability and insurance may not continue to be available on commercially acceptable terms or at all, or we may face increased deductibles on such insurance. A significant dram-shop claim or claims could have a material adverse effect on us as a result of the costs of defending against such claims; paying deductibles and increased insurance premium amounts; implementing improved training and heightened control procedures for our employees; and paying any damages or settlements on such claims.
If one of our employees sells alcoholic beverages to a minor patron, we may be liable for significant fines or penalties including the suspension or loss of our liquor license.
We are subject to statutes of the jurisdictions in which we serve alcoholic beverages which prohibit us from selling or serving alcohol to minor patrons. These statutes generally provide that serving or selling alcohol to minors is a violation of the law, and will result in fines and other penalties including the suspension or loss of our license to sell alcohol in the future. If we were to incur a significant number of sale to minor violations the fines or penalties could have a material adverse effect on us.
Federal, state and local environmental regulations relating to the use, storage, discharge, emission and disposal of hazardous materials could expose us to liabilities, which could adversely affect our results of operations.
We are subject to a variety of federal, state and local environmental regulations relating to the use, storage, discharge, emission and disposal of hazardous substances or other regulated materials, release of pollutants into the air, soil and water, and the remediation of contaminated sites.
Failure to comply with environmental laws could result in the imposition of fines or penalties, restrictions on operations by governmental agencies or courts of law, as well as investigatory or remedial liabilities and claims for alleged personal injury or damages to property or natural resources. Some environmental laws impose strict, and under some circumstances joint and several, liability for costs of investigation and remediation of contaminated sites on current and prior owners or operators of the sites, as well as those entities that send regulated materials to the sites. We cannot assure you that we have been or will be at all times in complete compliance with such laws, regulations and permits. Therefore, our costs of complying with current and future environmental, health and safety laws could adversely affect our results of operations.
We are subject to all of the risks associated with leasing property subject to long-term non-cancelable leases.
The leases for our restaurant locations generally have initial terms of 10 to 20 years, and typically provide for renewal options in five year increments as well as for rent escalations. Generally, our leases are “net” leases, which require us to pay all of the costs of insurance, taxes, maintenance and utilities. We generally cannot cancel these leases. Additional sites that we lease are

21


likely to be subject to similar long-term non-cancelable leases. If an existing or future restaurant is not profitable, and we decide to close it, we may nonetheless be obligated to perform our monetary obligations under the applicable lease including, among other things, paying all amounts due for the balance of the lease term. In addition, as each of our leases expire, we may fail to negotiate renewals, either on commercially acceptable terms or at all, which could cause us to close restaurants in desirable locations.
Our failure or inability to enforce our trademarks or other proprietary rights could adversely affect our competitive position or the value of our brand.
We own certain common law trademark rights and a number of federal and international trademark and service mark registrations, including the Pollo Tropical, Taco Cabana and Cabana Grill names and logos, and proprietary rights relating to certain of our core menu offerings. We believe that our trademarks and other proprietary rights are important to our success and our competitive position. We, therefore, devote appropriate resources to the protection of our trademarks and proprietary rights. The protective actions that we take, however, may not be enough to prevent unauthorized usage or imitation by others, which could harm our image, brand or competitive position and, if we commence litigation to enforce our rights, cause us to incur significant legal fees.
We are not aware of any assertions that our trademarks or menu offerings infringe upon the proprietary rights of third parties, but we cannot assure you that third parties will not claim infringement by us in the future. Any such claim, whether or not it has merit, could be time-consuming, result in costly litigation, cause delays in introducing new menu items in the future or require us to enter into royalty or licensing agreements. As a result, any such claim could have a material adverse effect on our business, results of operations and financial condition.
We are dependent on information technology, and any material failure of that technology could impair our ability to efficiently operate our business.
We rely on information systems across our operations, including, for example, point-of-sale processing in our restaurants, management of our supply chain, collection of cash, and payment of obligations and various other processes and procedures. Our ability to efficiently manage our business depends significantly on the reliability and capacity of these systems. The failure of these systems to operate effectively, problems with maintenance, upgrading or transitioning to replacement systems or a breach in security of these systems could cause delays in guest service and reduce efficiency in our operations. Significant capital investments might be required to remediate any problems.
Risks Related to Our Common Stock
The market price of our common stock may be highly volatile or may decline regardless of our operating performance.
The trading price of our common stock may fluctuate substantially. The price of our common stock that will prevail in the market may be higher or lower than the price you pay, depending on many factors, some of which are beyond our control. Broad market and industry factors may adversely affect the market price of our common stock, regardless of our actual operating performance. The fluctuations could cause a loss of all or part of an investment in our common stock. Factors that could cause fluctuation in the trading price of our common stock may include, but are not limited to the following:
price and volume fluctuations in the overall stock market from time to time;
significant volatility in the market price and trading volume of companies generally or restaurant companies;
actual or anticipated variations in the earnings or operating results of our company or our competitors;
actual or anticipated changes in financial estimates by us or by any securities analysts who might cover our stock or the stock of other companies in our industry;
market conditions or trends in our industry and the economy as a whole;
announcements by us or our competitors of significant acquisitions, strategic partnerships or divestitures and our ability to complete any such transaction;
announcements of investigations or regulatory scrutiny of our operations or lawsuits filed against us;
capital commitments;
changes in accounting principles;
additions or departures of key personnel; and
sales of our common stock, including sales of large blocks of our common stock or sales by our directors and officers.
In addition, if the market for restaurant company stocks or the stock market in general experiences loss of investor confidence, the trading price of our common stock could decline for reasons unrelated to our business, results of operations or financial

22


condition. The trading price of our common stock might also decline in reaction to events that affect other companies in our industry or related industries even if these events do not directly affect us.
In the past, following periods of volatility in the market price of a company’s securities, class action securities litigation has often been brought against that company. Due to the potential volatility of our stock price, we may therefore be the target of securities litigation in the future. Securities litigation could result in substantial costs and divert management’s attention and resources from our business, and could also require us to make substantial payments to satisfy judgments or to settle litigation.
We do not expect to pay any cash dividends for the foreseeable future, and our senior credit facility limits our ability to pay dividends to our stockholders.
We do not anticipate that we will pay any cash dividends to holders of our common stock in the foreseeable future. The absence of a dividend on our common stock may increase the volatility of the market price of our common stock or make it more likely that the market price of our common stock will decrease in the event of adverse economic conditions or adverse developments affecting our company. Our senior credit facility limits, and the debt instruments that we and our subsidiaries may enter into in the future may limit, our ability to pay dividends to our stockholders.
If securities analysts do not publish research or reports about our business or if they downgrade our stock, the price of our stock could decline.
The trading market for our common stock will rely in part on the research and reports that industry or financial analysts publish about us or our business. We cannot assure you that these analysts will publish research or reports about us or that any analysts that do so will not discontinue publishing research or reports about us in the future. If one or more analysts who cover us downgrade our stock, our stock price could decline rapidly. If analysts do not publish reports about us or if one or more analyst ceases coverage of our stock, we could lose visibility in the market, which in turn could cause our stock price to decline.
Your percentage ownership of our common stock may be diluted in the future.
Your percentage ownership of our common stock may be diluted in the future because of equity awards that we expect will be granted to our directors, officers and employees. The Fiesta Restaurant Group, Inc. 2012 Stock Incentive Plan provides for the grant of equity-based awards, including restricted stock, restricted stock units, stock options, and other equity-based awards to our directors, officers and other employees, advisors and consultants.
Provisions in our restated certificate of incorporation and amended and restated bylaws or Delaware law might discourage, delay or prevent a change of control of our company or changes in our management and, therefore, depress the trading price of our common stock.
Delaware corporate law and our restated certificate of incorporation and amended and restated bylaws contain provisions that could discourage, delay or prevent a change in control of our company or changes in our management that the stockholders of our company may deem advantageous. These provisions:
require that special meetings of our stockholders be called only by our board of directors or certain of our officers, thus prohibiting our stockholders from calling special meetings;
deny holders of our common stock cumulative voting rights in the election of directors, meaning that stockholders owning a majority of our outstanding common stock will be able to elect all of our directors;
authorize the issuance of "blank check" preferred stock that our board could issue to dilute the voting and economic rights of our common stock and to discourage a takeover attempt;
provide the approval of our board or directors or a supermajority of stockholders is necessary to make, alter or repeal our amended and restated bylaws and that approval of a supermajority of stockholders is necessary to amend, alter or change certain provisions of our restated certificate of incorporation;
establish advance notice requirements for stockholder nominations for election to our board or for proposing matters that can be acted upon by stockholders at stockholder meetings;
divided our board into three classes of directors, with each class serving a staggered 3-year term, which generally increases the difficulty of replacing a majority of the directors;
provide that directors only may be removed for cause by a majority of the board and/or by a supermajority of our stockholders; and
require that any action required or permitted to be taken by our stockholders must be effected at a duly called annual or special meeting of stockholders and may not be effected by any consent in writing.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.

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ITEM 2. PROPERTIES
As of December 28, 2014, we owned or leased the following operating restaurant properties:
 
 
Owned
Leased (1) 
Total (2)
Restaurants:
 
 
 
Pollo Tropical
6

118

124

Taco Cabana
9

158

167

Total operating restaurants
15

276

291

(1)
Includes twelve restaurants located in in-line or storefront locations.
(2)
Excludes restaurants operated by our Pollo Tropical and Taco Cabana franchisees. In addition, as of December 28, 2014, we had eleven restaurants under development and six properties leased to third parties.
As of December 28, 2014, we leased 95% of our Pollo Tropical restaurants and 95% of our Taco Cabana restaurants. We typically enter into leases (including renewal options) ranging from 35 to 45 years. The average remaining term for all leases, including options, was approximately 26 years as of December 28, 2014. Generally, we have been able to renew leases, upon or prior to their expiration, at the prevailing market rates, although there can be no assurance that this will continue to occur.
Most leases require us to pay utility and water charges and real estate taxes. Certain leases also require contingent rentals based upon a percentage of gross sales of the particular restaurant that exceed specified minimums. In some of our mall locations, we are also required to pay certain other charges such as a pro-rata share of the mall's common area maintenance costs, insurance and security costs.
In addition to the restaurant locations, we lease approximately 21,000 square feet at 14800 Landmark Boulevard, Suite 500, Addison, Texas which houses our executive offices and certain of our administrative functions. We also lease approximately 13,500 square feet at 7300 North Kendall Drive, 8th Floor, Miami, Florida, which houses most of our administrative operations for our Pollo Tropical restaurants. In addition, we lease approximately 17,700 square feet of office space at 8918 Tesoro Drive, Suite 200, San Antonio, Texas, which houses most of our administrative operations for our Taco Cabana restaurants.
ITEM 3. LEGAL PROCEEDINGS
On September 29, 2014, Daisy, Inc. ("Daisy"), an automotive repair shop in Cape Coral, Florida, filed a putative class action suit against Fiesta Restaurant Group, Inc. in the United States District Court for the Middle District of Florida. The suit claims that Fiesta allegedly engaged in unlawful activity in violation of the Telephone Consumer Protection Act, § 227 et seq. (the "TCPA"). Daisy alleges that it received three unlawful faxes and does not identify any other purported class members. Each violation under the TCPA provides for $500 in statutory damages ($1,500 if a willful violation is shown). Plaintiff Daisy seeks statutory damages, damages for willful violations, attorneys' fees, costs and injunctive relief, and to certify a class. Neither the Complaint nor any other pleading quantifies Daisy's or the putative class' damages or provides greater specificity as to the size and nature of the purported class. While we are vigorously defending against any liability, there can be no assurance that we will be successful in our defense or that a negative outcome would not have a material adverse effect on us. The amount of any loss related to this matter cannot be reasonably estimated at this time. Fiesta does not have insurance coverage for this claim.
We are a party to various other litigation matters incidental to the conduct of our business. We do not believe that the outcome of any of these matters will have a material adverse effect on our business, results of operations or financial condition.
ITEM 4. MINE SAFETY DISCLOSURES
None.
PART II
ITEM  5.
MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock trades on The NASDAQ Global Select Market under the symbol “FRGI”. The common stock has been quoted on The NASDAQ Global Select Market since May 8, 2012. On February 12, 2015, there were 26,782,996 shares of our common stock outstanding held by 661 holders of record. This excludes persons whose shares are held by a brokerage house or clearing agency. The closing price of our common stock on February 12, 2015 was $62.13.
The following table presents the range of high and low closing prices of our common stock for the periods indicated, as reported by The NASDAQ Global Select Market:  

24


 
Common Stock Price 
 
 
    High     
 
    Low     
 
Year Ended December 28, 2014
 
 
First Quarter
$
52.62

$
40.55

Second Quarter
$
46.31

$
36.31

Third Quarter
$
51.49

$
42.16

Fourth Quarter
$
62.85

$
48.95

 
 
 
Year Ended December 29, 2013
 
 
First Quarter
$
26.92

$
15.32

Second Quarter
$
37.69

$
23.59

Third Quarter
$
37.56

$
30.87

Fourth Quarter
$
51.62

$
36.71

Dividends
We did not pay any cash dividends during 2014 or 2013. We do not anticipate paying any cash dividends on our common stock in the foreseeable future. We currently intend to retain all available funds to fund the development and growth of our business. In addition, we are a holding company and conduct all of our operations through our direct and indirect subsidiaries. As a result, for us to pay dividends, we need to rely on dividends and distributions to us from our subsidiaries. Our senior credit facility limits, and debt instruments that we and our subsidiaries may enter into in the future may limit, our ability to pay dividends to our stockholders.
Stock Performance Graph
The following graph compares, from May 8, 2012 (the date on which our common stock began "regular way" trading on The NASDAQ Global Select Market), the cumulative total stockholder return on our common stock with the cumulative total returns of The NASDAQ Composite Index and a peer group, The S&P Small Cap 600 Restaurant Index. We have elected to use the S&P Small Cap 600 Restaurant Index in compiling our stock performance graph because we believes the S&P Small Cap 600 Restaurant Index represents a comparison to competitors with similar market capitalization as us.
The initial trading price of our common stock on May 8, 2012 was $11.10 and the closing price of our common stock on December 26, 2014, the last trading day before our fiscal year end date of December 28, 2014, was $58.32. The following graph is based upon the closing price of our common stock from May 8, 2012 through December 31, 2014.


25


Total Cumulative Shareholder Returns
 
05/08/2012
06/30/2012
12/31/2012
06/30/2013
12/31/2013
06/30/2014
12/31/2014
Fiesta Restaurant Group, Inc  .
$
100.00

$
115.04

$
133.22

$
298.75

$
454.26

$
403.57

$
528.70

NASDAQ Composite
$
100.00

$
98.12

$
99.25

$
114.40

$
141.95

$
150.28

$
161.52

S&P Small Cap 600 Restaurants
$
100.00

$
104.27

$
107.07

$
140.43

$
172.57

$
175.60

$
218.74

The graph and table above provide the cumulative change of $100.00 invested on May 8, 2012, including reinvestment of dividends, if applicable, for the periods indicated.


26


ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth our selected consolidated financial data derived from our audited consolidated financial statements for each of the years ended December 28, 2014, December 29, 2013, December 30, 2012, January 1, 2012 and January 2, 2011. The information in the following table should be read together with our consolidated financial statements and accompanying notes as of December 28, 2014 and December 29, 2013 and for the years ended December 28, 2014, December 29, 2013 and December 30, 2012, and “Management's Discussion and Analysis of Financial Condition and Results of Operations” included under Item 7 of this Annual Report. These historical results are not necessarily indicative of the results to be expected in the future. Our fiscal years ended December 28, 2014, December 29, 2013, December 30, 2012, January 1, 2012 and January 2, 2011 each contained 52 weeks.
(Dollars in thousands, except share and per share data)
Year ended  
December 28, 2014  
 
December 29, 2013  
 
December 30, 2012  
 
January 1, 2012  
 
January 2, 2011  
Statement of operations data:
 
 
 
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
 
 
Restaurant sales
$
608,540

 
$
548,980

 
$
507,351

 
$
473,249

 
$
437,538

Franchise royalty revenues and fees
2,603

 
2,357

 
2,375

 
1,719

 
1,533

Total revenues
611,143

 
551,337

 
509,726

 
474,968

 
439,071

Costs and expenses:
 

 
 

 
 

 
 

 
 

Cost of sales
192,250

 
176,123

 
163,514

 
152,711

 
135,236

Restaurant wages and related expenses (including stock-based compensation expense of $71, $2, $11, $18 and $28, respectively)
155,140

 
143,392

 
136,265

 
129,083

 
122,519

Restaurant rent expense
29,645

 
26,849

 
21,595

 
16,841

 
16,620

Other restaurant operating expenses
78,921

 
69,021

 
63,813

 
61,398

 
59,680

Advertising expense
19,493

 
17,138

 
16,791

 
16,082

 
15,214

General and administrative (including stock-based compensation expense of $3,426, $2,296, $2,025, $1,690 and $974, respectively)
49,414

 
48,521

 
43,870

 
37,459

 
32,865

Depreciation and amortization
23,047

 
20,375

 
18,278

 
19,537

 
19,075

Pre-opening costs
4,061

 
2,767

 
1,673

 
750

 
543

Impairment and other lease charges
363

 
199

 
7,039

 
2,744

 
6,614

Other (income) expense (1)
(558
)
 
(554
)
 
(92
)
 
146

 

Total operating expenses
551,776

 
503,831

 
472,746

 
436,751

 
408,366

Income from operations
59,367

 
47,506

 
36,980

 
38,217

 
30,705

Interest expense
2,228

 
18,043

 
24,424

 
24,041

 
19,898

Loss on extinguishment of debt (2)

 
16,411

 

 

 

Income before income taxes
57,139

 
13,052

 
12,556

 
14,176

 
10,807

Provision for income taxes
20,963

 
3,795

 
4,289

 
4,635

 
3,764

Net income
$
36,176

 
$
9,257

 
$
8,267

 
$
9,541

 
$
7,043

 
 

 
 

 
 

 
 

 
 

Per share data:
 

 
 

 
 

 
 

 
 

Basic net income per share (3)
$
1.35

 
$
0.39

 
$
0.35

 
$
0.41

 
$
0.30

Diluted net income per share (3)
$
1.35

 
$
0.39

 
$
0.35

 
$
0.41

 
$
0.30

Weighted average shares outstanding:
 
 
 
 
 
 
 
 
 
Basic weighted average shares outstanding (3)
26,293,714

 
23,271,431

 
22,890,018

 
23,161,822

 
23,161,822

Diluted weighted average shares outstanding (3)
26,296,049

 
23,271,431

 
22,890,018

 
23,161,822

 
23,161,822

Other financial data:
 
 
 
 
 
 
 
 
 
Net cash provided from operating activities
$
64,106

 
$
36,176

 
$
37,975

 
$
43,167

 
$
32,529

Net cash used for investing activities
(66,658
)
 
(34,067
)
 
(32,718
)
 
(15,082
)
 
(21,380
)
Net cash used for financing activities
(3,339
)
 
(6,664
)
 
(3,394
)
 
(16,998
)
 
(12,420
)
Total capital expenditures
(74,079
)
 
(47,025
)
 
(40,996
)
 
(22,865
)
 
(23,398
)

27


 
Year ended
(Dollars in thousands)
December 28, 2014  
 
December 29, 2013  
 
December 30, 2012  
 
January 1, 2012  
 
January 2, 2011  
Balance sheet data:
 

 
 

 
 

 
 

 
 

Total assets (4)
$
357,956

 
$
318,785

 
$
303,729

 
$
370,166

 
$
357,886

Working capital
(11,318
)
 
(5,162
)
 
(10,321
)
 
(9,064
)
 
(8,453
)
Long-term debt:
 

 
 

 
 

 
 

 
 

Due to former parent company
$

 
$

 
$

 
$
1,511

 
$
138,756

8.875% Senior Secured Second Lien Notes (2)

 

 
200,000

 
200,000

 

Revolving credit facility
66,000

 
71,000

 

 

 

Lease financing obligations (4)
1,660

 
1,657

 
3,029

 
123,019

 
122,975

Capital leases
1,325

 
1,385

 
949

 
1,008

 
1,064

Total long-term debt
$
68,985

 
$
74,042

 
$
203,978

 
$
325,538

 
$
262,795

 
 

 
 

 
 

 
 

 
 

Stockholders' equity (deficit)
$
199,587

 
$
158,306

 
$
10,504

 
$
(4,672
)
 
$
57,911

Operating statistics:
 
 
 
 
 

 
 

 
 

Consolidated:
 
 
 
 
 
 
 
 
 
Restaurant-Level Adjusted EBITDA (5)
$
129,101

 
$
113,692

 
$
103,711

 
$
96,402

 
$
87,754

Restaurant-Level Adjusted EBITDA margin (5)
21.2
%
 
20.7
%
 
20.4
%
 
20.4
%
 
20.1
%
Adjusted EBITDA (5)
85,716

 
69,824

 
64,241

 
62,352

 
57,396

Adjusted EBITDA margin (5)
14.0
%
 
12.7
%
 
12.6
%
 
13.1
%
 
13.1
%
Total company-owned restaurants (at end of period)
291

 
267

 
251

 
249

 
246

Pollo Tropical:
 

 
 

 
 

 
 

 
 

Company-owned restaurants (at end of period)
124

 
102

 
91

 
91

 
91

Average number of company-owned restaurants
112.3

 
96.7

 
89.6

 
91

 
90.5

Revenues:
 

 
 

 
 

 
 

 
 

Restaurant sales
$
305,404

 
$
257,837

 
$
227,428

 
$
208,115

 
$
186,045

Franchise royalty revenues and fees
2,072

 
1,865

 
1,915

 
1,410

 
1,248

Total revenues
307,476

 
259,702

 
229,343

 
209,525

 
187,293

Average annual sales per company-owned restaurant (6)
2,720

 
2,666

 
2,538

 
2,287

 
2,056

Restaurant-Level Adjusted EBITDA (5)
75,575

 
65,738

 
57,094

 
51,748

 
44,826

Restaurant-Level Adjusted EBITDA margin (5)
24.7
%
 
25.5
%
 
25.1
%
 
24.9
%
 
24.1
%
Adjusted EBITDA (5)
52,721

 
43,738

 
38,592

 
35,567

 
30,062

Adjusted EBITDA margin (5)
17.1
%
 
16.8
%
 
16.8
%
 
17.0
%
 
16.1
%
Change in comparable company-owned restaurant sales (7)
6.6
%
 
5.9
%
 
8.1
%
 
9.9
%
 
7.4
%
Taco Cabana:
 

 
 

 
 

 
 

 
 

Company-owned restaurants (at end of period)
167

 
165

 
160

 
158

 
155

Average number of company-owned restaurants
165.6

 
163.3

 
158.3

 
156.9

 
155.6

Revenues:
 

 
 

 
 

 
 

 
 

Restaurant sales
$
303,136

 
$
291,143

 
$
279,923

 
$
265,134

 
$
251,493

Franchise royalty revenues and fees
531

 
492

 
460

 
309

 
285

Total revenues
303,667

 
291,635

 
280,383

 
265,443

 
251,778

Average annual sales per company-owned restaurant (6)
1,831

 
1,783

 
1,768

 
1,690

 
1,616

Restaurant-Level Adjusted EBITDA (5)
53,526

 
47,954

 
46,617

 
44,654

 
42,928

Restaurant-Level Adjusted EBITDA margin (5)
17.7
%
 
16.5
%
 
16.7
%
 
16.8
%
 
17.1
%
Adjusted EBITDA (5)
32,995

 
26,086

 
25,649

 
26,785

 
27,334

Adjusted EBITDA margin (5)
10.9
%
 
8.9
%
 
9.1
%
 
10.1
%
 
10.9
%
Change in comparable company-owned restaurant sales (7)
3.3
%
 
0.5
%
 
4.7
%
 
3.7
%
 
0.3
%

28


(1)
Other income for the year ended December 28, 2014 consisted primarily of a gain of $0.6 million from a condemnation award resulting from an eminent domain proceeding related to a location that closed in 2014. Other income for the year ended December 29, 2013 resulted primarily from a gain of $0.5 million from the sale of a non-operating Pollo Tropical restaurant property. Other income for the year ended December 30, 2012 also resulted from a gain of $0.1 million from the sale of a non-operating Pollo Tropical restaurant property. Other expense in the year ended January 1, 2012 resulted from a loss of $0.1 million from the sale of a Taco Cabana restaurant property in a sale-leaseback transaction.
(2)
In the year ended December 29, 2013, we completed a tender offer and consent solicitation for all of our outstanding $200.0 million 8.875% Senior Secured Second Lien Notes due 2016 and called for redemption and redeemed all of our Notes that were not validly tendered and accepted for payment in the tender offer. We recognized a loss on extinguishment of debt of $16.4 million in the fourth quarter of 2013 related to the repurchase and redemption of the Notes. The loss on extinguishment of debt includes the write-off of $3.9 million in deferred financing costs related to the Notes and $12.5 million of debt redemption premiums, consent payments, additional interest and other fees related to the redemption of the Notes.
(3)
Basic and diluted weighted average common shares outstanding reflect a 23,161.822 for one split of our outstanding common stock, which occurred on April 19, 2012.
(4)
Prior to the Spin-off, certain sale-leaseback transactions were classified as lease financing transactions because Carrols guaranteed the related lease payments. Effective upon the Spin-off, the provisions that previously precluded sale-leaseback accounting were cured or eliminated. As a result, the real property leases entered into in connection with these transactions are now recorded as operating leases. Because of this change in accounting treatment, we recorded a decrease in lease financing obligations of $114.2 million, a decrease in assets under lease financing obligations of $80.4 million, and a decrease of $1.6 million in deferred financing fees in 2012.
(5)
Adjusted EBITDA is defined as earnings before interest, loss on extinguishment of debt, income taxes, depreciation and amortization, impairment and other lease charges, stock-based compensation expense and other income and expense. Adjusted EBITDA for each of our Pollo Tropical and Taco Cabana segments includes an allocation of general and administrative expenses associated with administrative support for executive management, information systems and certain accounting, legal, supply chain, development and other administrative functions. Adjusted EBITDA margin is derived by dividing Adjusted EBITDA by total revenues.
Restaurant-Level Adjusted EBITDA is defined as Adjusted EBITDA excluding franchise royalty revenue and fees and general and administrative expense (including corporate-level general and administrative expenses). Restaurant-Level Adjusted EBITDA margin is derived by dividing Restaurant-Level Adjusted EBITDA by restaurant sales.
Adjusted EBITDA, Adjusted EBITDA margin, Restaurant-Level Adjusted EBITDA and Restaurant-Level Adjusted EBITDA margin are non-GAAP financial measures. Management believes that such financial measures, when viewed with our results of operations calculated in accordance with GAAP and our reconciliation of Restaurant-Level Adjusted EBITDA and Adjusted EBITDA to net income (i) provide useful information about our operating performance and period-over-period growth, (ii) provide additional information that is useful for evaluating the operating performance of our business, and (iii) permit investors to gain an understanding of the factors and trends affecting our ongoing earnings, from which capital investments are made and debt is serviced. However, such measures are not measures of financial performance or liquidity under GAAP and, accordingly should not be considered as alternatives to net income or cash flow from operating activities as indicators of operating performance or liquidity. Also these measures may not be comparable to similarly titled captions of other companies.


29


A reconciliation of Restaurant-Level Adjusted EBITDA and Adjusted EBITDA to consolidated net income is presented below:
 
Year ended
(Dollars in thousands)
December 28, 2014  
 
December 29, 2013
 
December 30, 2012  
 
January 1, 2012  
 
January 2, 2011  
Restaurant-Level Adjusted EBITDA:
 
 
 
 
 
 
 
 
 
Pollo Tropical
$
75,575

 
$
65,738

 
$
57,094

 
$
51,748

 
$
44,826

Taco Cabana
53,526

 
47,954

 
46,617

 
44,654

 
42,928

Consolidated
129,101

 
113,692

 
103,711

 
96,402

 
87,754

Add:
 
 
 
 
 
 
 
 
 
Franchise royalty revenue and fees
2,603

 
2,357

 
2,375

 
1,719

 
1,533

Less:
 
 
 
 
 
 
 
 
 
General and administrative (excluding stock-based compensation expense of $3,426, $2,296, $2,025, $1,690 and $974 respectively)
45,988

 
46,225

 
41,845

 
35,769

 
31,891

Adjusted EBITDA:
 
 
 
 
 
 
 
 
 
Pollo Tropical
$
52,721

 
$
43,738

 
$
38,592

 
$
35,567

 
$
30,062

Taco Cabana
32,995

 
26,086

 
25,649

 
26,785

 
27,334

Consolidated
85,716

 
69,824

 
64,241

 
62,352

 
57,396

Less:
 

 
 

 
 

 
 

 
 

Depreciation and amortization
23,047

 
20,375

 
18,278

 
19,537

 
19,075

Impairment and other lease charges
363

 
199

 
7,039

 
2,744

 
6,614

Interest expense
2,228

 
18,043

 
24,424

 
24,041

 
19,898

Loss on extinguishment of debt

 
16,411

 

 

 

Provision for income taxes
20,963

 
3,795

 
4,289

 
4,635

 
3,764

Stock-based compensation expense
3,497

 
2,298

 
2,036

 
1,708

 
1,002

Other (income) expense
(558
)
 
(554
)
 
(92
)
 
146

 

Net income
$
36,176

 
$
9,257

 
$
8,267

 
$
9,541

 
$
7,043

(6)
Average annual sales per company-owned restaurant are derived by dividing restaurant sales for the applicable segment by the average number of company-owned and operated restaurants. For comparative purposes, the calculation of average annual sales per company-owned restaurant is based on a 52-week fiscal year.
(7)
Restaurants are included in comparable restaurant sales after they have been open for 18 months. For comparative purposes, the calculation of the changes in comparable restaurant sales is based on a 52-week fiscal year.


30


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of financial condition and results of operations ("MD&A") is written to help the reader understand our company. The MD&A is provided as a supplement to, and should be read in conjunction with, our consolidated financial statements and the accompanying financial statement notes. Any reference to restaurants refers to company-owned restaurants unless otherwise indicated.
On May 7, 2012, Carrols Restaurant Group, Inc. ("Carrols") completed the Spin-off of Fiesta into an independent public company, through the distribution of all of the outstanding shares of Fiesta Restaurant Group's common stock to the stockholders of Carrols ("the Spin-off"). As a result of the Spin-off, we became an independent public company whose common stock is traded on The NASDAQ Global Select Market under the symbol “FRGI.”
We use a 52-53 week fiscal year ending on the Sunday closest to December 31. The fiscal years ended December 28, 2014, December 29, 2013 and December 30, 2012 each contained 52 weeks. The fiscal year ending January 3, 2016 will contain 53 weeks.
Company Overview
We own, operate and franchise two fast-casual restaurant brands, Pollo Tropical® and Taco Cabana®, which have over 25 years and 35 years, respectively, of operating history and loyal customer bases. Our Pollo Tropical restaurants offer a wide variety of freshly prepared Caribbean inspired food, while our Taco Cabana restaurants offer a broad selection of hand-made, freshly prepared and authentic Mexican food. We believe that both brands are differentiated from other restaurant concepts and offer a unique dining experience. We are positioned within the value-oriented fast-casual restaurant segment, which combines the convenience and value of quick-service restaurants with the variety, food quality, décor and atmosphere more typical of casual dining restaurants. Our open display kitchen format allows guests to view and experience our food being freshly-prepared and cooked to order. Additionally, nearly all of our restaurants offer the convenience of drive-thru windows. As of December 28, 2014, our company-owned restaurants included 124 Pollo Tropical restaurants and 167 Taco Cabana restaurants (including two restaurants under the Cabana Grill® logo, which is an elevated, non-24 hour format for Taco Cabana which we are currently testing outside of Texas).
We franchise our Pollo Tropical restaurants primarily internationally and as of December 28, 2014, we had 37 franchised Pollo Tropical restaurants located in Puerto Rico, Ecuador, Honduras, Trinidad & Tobago, the Bahamas, Venezuela, Panama, the Dominican Republic, Guatemala, and on college campuses in Florida. We have agreements for the continued development of franchised Pollo Tropical restaurants in certain of our existing franchised markets, and we have commitments for additional non-traditional locations in U.S. markets in which we currently operate.
As of December 28, 2014, we had four Taco Cabana franchised restaurants located in New Mexico and three non-traditional Taco Cabana licensed locations in Texas.
Events Affecting our Results of Operations
Refinancing, Repurchase and Redemption of Outstanding Indebtedness
On November 12, 2013, we commenced a tender offer and consent solicitation for all of our outstanding $200.0 million aggregate principal amount of 8.875% Senior Secured Second Lien Notes due 2016 (the "Notes"). The principal amount of Notes repurchased in the tender offer totaled $122.7 million.
On November 20, 2013, we sold 3,078,336 shares of Fiesta's common stock in an underwritten public offering at a price of $46.00 per share (excluding underwriting discounts and commissions). The aggregate net proceeds to us from the offering were approximately $135.3 million, reflecting gross proceeds of $141.6 million, net of underwriting fees of approximately $5.7 million and other offering costs of approximately $0.7 million.
On December 11, 2013, we irrevocably called for redemption the remaining $77.3 million principal amount of Notes that were not validly tendered and accepted for payment in the tender offer.
Also on December 11, 2013, we terminated our former senior secured revolving credit facility, which we refer to as our “former senior credit facility”, and entered into a new senior secured revolving credit facility, which we refer to as our "senior credit facility". The senior credit facility provides for aggregate revolving credit borrowings of up to $150 million (including $15 million available for letters of credit) and matures on December 11, 2018. On December 28, 2014, there was $66.0 million of outstanding borrowings under our senior credit facility.
We recognized a loss on extinguishment of debt of $16.4 million in the fourth quarter of 2013 related to the repurchase and redemption of the Notes. The loss on extinguishment of debt includes the write-off of $3.9 million in deferred financing

31


costs related to the Notes and $12.5 million of debt redemption premiums, consent payments, additional interest and other fees related to the redemption of the Notes.
Interest expense decreased $15.8 million in the twelve months ended December 28, 2014 as a result of the refinancing, repurchase and redemption of our Notes, net of capitalized interest.
Lease Financing Obligations
For certain of our sale-leaseback transactions, Carrols has guaranteed the lease payments on an unsecured basis or is the primary lessee on the leases. Prior to the Spin-off, Accounting Standards Codification 840-40 “Sale-Leaseback Transactions” required us to classify these leases as lease financing transactions because the guarantee from a related party constituted continuing involvement and caused the sale to not qualify for sale-leaseback accounting. These leases qualified for sale-leaseback accounting upon the Spin-off due to the cure or elimination of certain provisions that previously precluded sale-leaseback accounting (and the treatment of such leases as operating leases) in our consolidated financial statements, primarily the guarantees from Carrols . As a result of the qualification for sale-leaseback accounting during the second quarter of 2012 due to the Spin-off, such leases were treated as operating leases and we removed the associated lease financing obligations, property and equipment, and deferred financing costs from our balance sheet, and recognized deferred gains on sale-leaseback transactions related to the qualification of $32.1 million that is being amortized as a reduction of rent expense over the individual remaining lease terms. As a result of the qualification of these leases and the purchase of five additional properties previously accounted for as lease financing obligations, restaurant rent expense was $2.8 million higher, depreciation expense was $0.7 million lower and interest expense was $3.9 million lower in 2013 compared to the same period in 2012.
Executive Summary-Consolidated Operating Performance for the Year Ended December 28, 2014
Our fiscal year 2014 results and highlights include the following:
Net income increased $26.9 million to $36.2 million in 2014, or $1.35 per diluted share, compared to net income of $9.3 million, or $0.39 per diluted share, primarily due to the net impact of the growth in revenues discussed below, the decrease in interest expense as a result of the refinancing transactions, which included the repurchase and redemption of our Notes and entering into our senior credit facility, and the loss on extinguishment of debt in 2013.
Total revenues increased 10.8% in 2014 to $611.1 million from $551.3 million in 2013, driven primarily by an increase in the number of company-owned restaurants and an increase in comparable restaurant sales of 6.6% for our Pollo Tropical restaurants and 3.3% for our Taco Cabana restaurants. The growth in comparable restaurant sales resulted primarily from an increase in average check of 2.0% at Pollo Tropical and 3.2% at Taco Cabana and an increase in transactions of 4.6% at Pollo Tropical and 0.1% at Taco Cabana.
During 2014, we opened 22 new company-owned Pollo Tropical restaurants and four new company-owned Taco Cabana restaurants and permanently closed two company-owned Taco Cabana restaurants.

32


Results of Operations
The following table sets forth, for the years ended December 28, 2014, December 29, 2013 and December 30, 2012, selected consolidated operating results as a percentage of consolidated restaurant sales and selected segment operating results as a percentage of applicable segment restaurant sales: 
 
Year Ended
 
December 28, 2014
 
December 29, 2013
 
December 30, 2012
 
December 28, 2014
 
December 29, 2013
 
December 30, 2012
 
December 28, 2014
 
December 29, 2013
 
December 30, 2012
 
Pollo Tropical
 
Taco Cabana
 
Consolidated
Restaurant sales:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pollo Tropical


 


 
 
 


 
 
 
 
 
50.19
%
 
46.97
%
 
44.8
%
Taco Cabana
 
 
 
 
 
 
 
 
 
 
 
 
49.81
%
 
53.03
%
 
55.2
%
Consolidated restaurant sales
 
 
 
 
 
 
 
 
 
 
 
100.0
%
 
100.0
%
 
100.0
%
Costs and expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of sales
32.9
%
 
33.2
%
 
33.1
%
 
30.3
%
 
31.1
%
 
31.5
%
 
31.6
%
 
32.1
%
 
32.2
%
Restaurant wages and related expenses
22.1
%
 
22.5
%
 
23.6
%
 
28.9
%
 
29.4
%
 
29.5
%
 
25.5
%
 
26.1
%
 
26.9
%
Restaurant rent expense
4.1
%
 
3.9
%
 
3.4
%
 
5.7
%
 
5.7
%
 
5.0
%
 
4.9
%
 
4.9
%
 
4.3
%
Other restaurant operating expenses
12.6
%
 
11.9
%
 
11.8
%
 
13.4
%
 
13.1
%
 
13.2
%
 
13.0
%
 
12.6
%
 
12.6
%
Advertising expense
2.5
%
 
2.2
%
 
2.5
%
 
3.9
%
 
3.9
%
 
4.0
%
 
3.2
%
 
3.1
%
 
3.3
%
Pre-opening costs
1.1
%
 
0.8
%
 
0.5
%
 
0.2
%
 
0.2
%
 
0.2
%
 
0.7
%
 
0.5
%
 
0.3
%
The following table summarizes the changes in the number and mix of Pollo Tropical and Taco Cabana company-owned and franchised restaurants in each fiscal year:
 
2014
 
2013
 
2012
 
Owned
 
Franchised
 
Total
 
Owned
 
Franchised
 
Total
 
Owned
 
Franchised
 
Total
Pollo Tropical:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


Beginning of year
102

 
39

 
141

 
91

 
35

 
126

 
91

 
31

 
122

   New
22

 
5

 
27

 
12

 
7

 
19

 
5

 
5

 
10

   Closed

 
(7
)
 
(7
)
 
(1
)
 
(3
)
 
(4
)
 
(5
)
 
(1
)
 
(6
)
End of year
124

 
37

 
161

 
102

 
39

 
141

 
91

 
35

 
126

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Taco Cabana:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning of year
165

 
7

 
172

 
160

 
8

 
168

 
158


5

 
163

   New
4

 

 
4

 
6

 

 
6

 
5

 
1

 
6

   Sold to franchisee

 

 

 

 

 

 
(2
)
 
2

 

   Closed
(2
)
 

 
(2
)
 
(1
)
 
(1
)
 
(2
)
 
(1
)
 

 
(1
)
End of year
167

 
7

 
174

 
165

 
7

 
172

 
160

 
8

 
168

Consolidated Revenues. Revenues include restaurant sales, which consist of food and beverage sales, net of discounts, at our company-owned restaurants, and franchise royalty revenues and fees, which represent ongoing royalty payments that are determined based on a percentage of franchisee sales, franchise fees associated with new restaurant openings, and development fees associated with the opening of new franchised restaurants in a given market. Restaurant sales are influenced by new restaurant openings, closures of restaurants and changes in comparable restaurant sales.

33


Total revenues increased 10.8% to $611.1 million in 2014 from $551.3 million in 2013, while the 2013 revenues represent an increase of 8.2% from $509.7 million in 2012. Restaurant sales also increased 10.8% to $608.5 million in 2014 from $549.0 million in 2013, which represents an increase of 8.2% from $507.4 million in 2012. The following table presents the primary drivers of the increase in restaurant sales for both Pollo Tropical and Taco Cabana (in millions):
 
2014 vs. 2013
 
2013 vs. 2012
Pollo Tropical:
 
 
 
Increase in comparable restaurant sales
$
16.2

 
$
12.8

Incremental sales related to new restaurants, net of closed restaurants
31.4

 
17.6

   Total increase
$
47.6

 
$
30.4

 
 
 
 
Taco Cabana:
 
 
 
Increase in comparable restaurant sales
$
9.3

 
$
1.3

Incremental sales related to new restaurants, net of closed restaurants
2.7

 
9.9

   Total increase
$
12.0

 
$
11.2

Comparable restaurant sales for Pollo Tropical restaurants increased 6.6% in 2014 and 5.9% in 2013. Comparable restaurant sales for Taco Cabana restaurants increased 3.3% in 2014 and 0.5% in 2013. Restaurants are included in comparable restaurant sales after they have been open for 18 months. Increases in comparable restaurant sales result primarily from an increase in guest traffic and an increase in average check. The increase in average check is primarily driven by menu price increases. For Pollo Tropical, menu price increases drove an increase in restaurant sales of 2.3% in 2014 as compared to 2013, and 2.2% in 2013 as compared to 2012. For Taco Cabana, menu price increases drove an increase in restaurant sales of 1.4% in 2014 as compared to 2013, and the remaining increase in average check was primarily driven by a positive change in sales mix due to the implementation of new menu boards during the first quarter of 2014. For Taco Cabana, menu price increases drove an increase in restaurant sales of 1.7% in 2013 as compared to 2012.
Restaurants in markets that haven't reached media efficiency generally have lower sales than restaurants in existing media-efficient markets.
Franchise revenues in 2014 increased $0.2 million from $2.4 million in 2013. Franchise revenues were $2.4 million in 2013 and 2012.
Operating costs and expenses. Operating costs and expenses include cost of sales, restaurant wages and related expenses, other restaurant expenses and advertising expenses. Cost of sales consists of food, paper and beverage costs including packaging costs, less rebates and purchase discounts. Cost of sales is generally influenced by changes in commodity costs, the sales mix of items sold and the effectiveness of our restaurant-level controls to manage food and paper costs. Key commodities, including chicken and beef, are generally purchased under contracts for future periods of up to one year.
Restaurant wages and related expenses include all restaurant management and hourly productive labor costs, employer payroll taxes, restaurant-level bonuses and related benefits. Payroll and related taxes and benefits are subject to inflation, including minimum wage increases and increased costs for health insurance, workers' compensation insurance and state unemployment insurance.
Other restaurant operating expenses include all other restaurant-level operating costs, the major components of which are utilities, repairs and maintenance, general liability insurance, real estate taxes and credit card fees.
Advertising expense includes all promotional expenses including television, radio, billboards and other sponsorships and promotional activities.
Pre-opening costs include costs incurred prior to opening a restaurant, including restaurant employee wages and related expenses, travel expenditures, recruiting, training, promotional costs associated with the restaurant opening and rent, including any non-cash rent expense recognized during the construction period. Pre-opening costs are generally incurred beginning four to six months prior to a restaurant opening.

34


The following tables present the primary drivers of the changes in the components of restaurant operating margins for Pollo Tropical and Taco Cabana. All percentages are stated as a percentage of applicable segment restaurant sales.
 
2014 vs. 2013
 
2013 vs. 2012
Pollo Tropical:
 
 
 
Cost of sales:
 
 
 
   Higher commodity costs
0.2
 %
 
0.8
 %
   Menu price increases
(0.8
)%
 
(0.8
)%
   Other
0.3
 %
 
 %
      Net decrease in cost of sales as a percentage of restaurant sales
(0.3
)%
 
 %
 
 
 
 
Restaurant wages and related expenses:
 
 
 
   Impact of higher sales volumes on fixed labor costs for comparable stores
(0.5
)%
 
(0.5
)%
   Higher labor costs and impact of lower sales volumes for new stores
0.5
 %
 
0.2
 %
   Lower workers' compensation claim costs
(0.1
)%
 
(0.4
)%
   Lower medical benefit costs
(0.1
)%
 
(0.2
)%
   Other
(0.2
)%
 
(0.2
)%
      Net decrease in restaurant wages and related expenses as a percentage of
(0.4
)%
 
(1.1
)%
       restaurant sales
 
 
 
 
 
 
 
Other operating expenses:
 
 
 
   Higher (lower) repairs and maintenance costs (1)
0.4
 %
 
(0.2
)%
   Lower utility costs
 %
 
(0.2
)%
   Higher insurance costs
 %
 
0.3
 %
   Other
0.3
 %
 
0.3
 %
      Net increase in other restaurant operating expenses as a
0.7
 %
 
0.2
 %
       percentage of restaurant sales
 
 
 
 
 
 
 
Advertising expense:
 
 
 
  Increase in advertising
0.3
 %
 
 %
  Impact of higher sales volumes
 %
 
(0.3
)%
      Net increase (decrease) in advertising expense as a percentage of
0.3
 %
 
(0.3
)%
       restaurant sales
 
 
 
 
 
 
 
Pre-opening costs:
 
 
 
   Increase in number of restaurants opened
0.3
 %
 
0.3
 %
      Net increase in pre-opening costs as a percentage of restaurant sales
0.3
 %
 
0.3
 %
(1) Includes additional costs in 2014 related to the conversion to Coca-Cola products under a new five year contract.

35


 
2014 vs. 2013
 
2013 vs. 2012
Taco Cabana:
 
 
 
Cost of sales:
 
 
 
   Higher commodity costs
0.9
 %
 
0.1
 %
   Menu price increases
(0.5
)%
 
(0.6
)%
   Menu board changes
(0.6
)%
 
 %
   Sales mix
(0.3
)%
 
0.1
 %
   Higher rebates and discounts
(0.2
)%
 
 %
   Other
(0.1
)%
 
 %
      Net decrease in cost of sales as a percentage of restaurant sales
(0.8
)%
 
(0.4
)%
 
 
 
 
Restaurant wages and related expenses:
 
 
 
   Impact of higher sales volumes on fixed labor costs
(0.4
)%
 
(0.3
)%
   Higher (lower) medical and other benefit and worker's compensation costs
(0.2
)%
 
0.2
 %
   Other
0.1
 %
 
(0.1
)%
      Net decrease in restaurant wages and related expenses as a percentage of
(0.5
)%
 
(0.2
)%
       restaurant sales
 
 

 
 
 
 
Other operating expenses:
 
 
 
   Higher (lower) utility costs
(0.1
)%
 
0.1
 %
   Higher (lower) repairs and maintenance costs (1)
0.3
 %
 
(0.2
)%
   Higher insurance costs
0.2
 %
 
 %
   Other
(0.1
)%
 
 %
      Net increase (decrease) in other restaurant operating expenses as a
0.3
 %
 
(0.1
)%
       percentage of restaurant sales
 
 
 
 
 
 
 
Advertising expense: