Description
Filed with the SEC from June 14 to June 20:
Carrols Restaurant Group (TAST)
Highland Investment Fund disclosed a new stake and said it reserves the right to contact management regarding strategic alternatives that the fast-food company—which owns a number of Burger King franchises, among others—could employ to increase shareholder value. Highland didn't disclose any specific proposals.
Highland said that it now owns 1,955,924 shares (8.4% of voting shares), bought from May 18 through June 13, at prices ranging from $5.13 to $6.11.
BUSINESS OVERVIEW
Overview
Our Company
We are one of the largest restaurant companies in the United States based on revenues, operating three restaurant brands in the quick-casual and quick-service restaurant segments with 547 restaurants operating in 17 states as of January 1, 2012. Through our indirect wholly-owned subsidiary, Fiesta Restaurant Group., we own and operate two restaurant brands, Pollo Tropical and Taco Cabana, which we acquired in 1998 and 2000, respectively. We are also the largest Burger King franchisee as of January 1, 2012, based on the number of restaurants, and have operated Burger King restaurants since 1976. As of January 1, 2012, our company-owned restaurants included 91 Pollo Tropical restaurants and 158 Taco Cabana restaurants, and we owned and operated 298 Burger King restaurants under franchise agreements.
We are franchising our Pollo Tropical restaurants primarily internationally and, as of January 1, 2012 we had 31 franchised restaurants located in Puerto Rico, Ecuador, Honduras, Trinidad, Venezuela, the Bahamas and on college campuses in Florida. We also have agreements for the future development of franchised Pollo Tropical restaurants in Panama, Tobago, Aruba, Curacao, Bonaire and Costa Rica. Although we are not actively franchising our Taco Cabana restaurants, we had five Taco Cabana franchised restaurants located in the United States as of January 1, 2012. For the year ended December 31, 2011, we had total revenues of $822.5 million.
On December 20, 2006, we and certain selling stockholders completed an initial public offering (the “IPO”) of our common stock. In connection with the IPO, our common stock was approved for listing on The NASDAQ Global Market and began trading on December 15, 2006 under the symbol “TAST”.
Spin Off of Fiesta Restaurant Group
In 2011, we announced our intention to split our business into two separate, publicly-traded companies through the tax-free spin-off of the common stock of Fiesta Restaurant Group to our stockholders in the form of a pro rata dividend, which we refer to as the “spin-off”. Upon the consummation of the spin-off, Fiesta Restaurant Group would continue to own and operate our Pollo Tropical and Taco Cabana businesses and we would continue to own and operate our franchised Burger King restaurants through our subsidiaries Carrols and Carrols LLC.
The completion of the spin-off remains conditioned on, among other things, final approval of our Board of Directors, receipt of a favorable private letter tax ruling from the Internal Revenue Service (the “IRS”), which has been received, the effectiveness of Fiesta Restaurant Group’s Registration Statement on Form 10 filed with the SEC with respect to the registration of its common stock under the Exchange Act and final listing approval of the Fiesta Restaurant Group common stock on the NASDAQ Global Market. Although we expect to complete the spin-off in April 2012, there can be no assurance that we will complete the spin-off by then or at all.
Burger King . Burger King is one of the largest hamburger restaurant chains in the world (as measured by the number of restaurants and system-wide sales) and we are the largest franchisee in the Burger King system, based on number of restaurants. Burger King restaurants are part of the quick-service restaurant segment which is the largest of the five major segments of the U.S. restaurant industry based on 2010 sales. Burger King restaurants feature the popular flame-broiled Whopper ® sandwich, as well as a variety of hamburgers and other sandwiches, fries, salads, breakfast items and other offerings. According to BKC, historically it has spent between 4% and 5% of its annual system sales on marketing, advertising and promotion to sustain and increase its high brand awareness. We benefit from BKC’s marketing and operating initiatives as well as its development and recent introduction of new menu items and enhancements to food preparation processes. As of January 1, 2012, we operated 298 Burger King restaurants located in 12 Northeastern, Midwestern and Southeastern states. For the year ended December 31, 2011, the average sales transaction at our Burger King restaurants was $5.80. For the year ended December 31, 2011, our Burger King restaurants generated total revenues of $347.5 million and average annual sales per restaurant of $1,154,000.
Fiesta Restaurant Group. We own and operate two quick-casual restaurant brands, Pollo Tropical ® and Taco Cabana ® , combining the convenience and value of quick-service restaurants with the menu variety, use of fresh ingredients and food quality more typical of casual dining restaurants. For the year ended December 31, 2011, our company-owned Pollo Tropical and Taco Cabana restaurants generated average annual sales per restaurant of $2,287,000 and $1,690,000, respectively, which we believe are among the highest in the quick-casual and quick-service segments, based on industry data from Technomic. For the year ended December 31, 2011, total revenues for our Fiesta Restaurant Group restaurants were $475.0 million, which represented 57.7% of our total consolidated revenues.
Pollo Tropical: Our Pollo Tropical restaurants offer tropical and Caribbean inspired menu items, featuring grilled chicken marinated in our proprietary blend of tropical fruit juices and spices. Our diverse menu also includes a line of “TropiChops ® ” (a casserole bowl of grilled chicken, pork or vegetables served on top of white rice and beans topped with freshly made salsa), a variety of chicken sandwiches, wraps, salads, roast pork, grilled ribs and wings, 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, corn and tossed and Caesar salads. We also offer uniquely Hispanic desserts, such as flan and tres leches. Most menu items are made fresh daily in each of our Pollo Tropical restaurants, which feature open display cooking on large, open flame grills that enable our customers to observe the fresh preparation of our food. Our Pollo Tropical restaurants feature our signature dining areas, designated to create an airy, inviting and tropical atmosphere. Additionally our Pollo Tropical restaurants provide our guests the option of take-out, as well as the convenience of drive-thru windows.
Pollo Tropical opened its first restaurant in 1988 in Miami, Florida. As of January 1, 2012, we owned and operated a total of 91 Pollo Tropical restaurants, of which 85 were located in Florida, one was located in Georgia and five were located in New Jersey. For the year ended December 31, 2011, the average sales transaction at our company-owned Pollo Tropical restaurants was $9.56 reflecting, in part, strong dinner and late night traffic, with dinner and late night sales representing the largest sales day-part at 53.3% for the year ended December 31, 2011. For the year ended December 31, 2011, our Pollo Tropical brand generated total revenues of $209.5 million.
Taco Cabana: Our Taco Cabana restaurants serve fresh Tex-Mex and traditional 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 a Cabana bowl, traditional Mexican and American breakfasts and other Tex-Mex dishes. Our Taco Cabana restaurants also offer a variety of beverage choices, including frozen margaritas and beer. Most of the menu items offered at Taco Cabana are prepared at each restaurant from fresh beef, chicken and produce delivered by suppliers. Our Taco Cabana restaurants feature interior, semi-enclosed and patio dining areas, which provide a vibrant decor and relaxing atmosphere. Additionally, our Taco Cabana restaurants provide our guests the option of take-out, as well as the convenience of drive-thru windows.
Taco Cabana opened its first restaurant in San Antonio, Texas in 1978. As of January 1, 2012, we owned and operated 158 Taco Cabana restaurants located in Texas, Oklahoma and New Mexico, of which 152 were located in Texas. A majority of our Taco Cabana restaurants are open 24 hours a day, generating balanced customer traffic and restaurant sales across multiple day-parts, with dinner sales representing the largest day-part at 26.0% for the year ended December 31, 2011. For the year ended December 31, 2011, the average sales transaction at our company-owned Taco Cabana restaurants was $8.14. For the year ended December 31, 2011, our Taco Cabana brand generated total revenues of $265.4 million.
Corporate Information. Carrols Restaurant Group is a Delaware corporation, incorporated in 1986. Carrols Restaurant Group conducts all of its operations through its direct and indirect subsidiaries and has no assets other than the shares of Carrols, its direct wholly-owned subsidiary. Prior to November 21, 2006 we were known as Carrols Holdings Corporation. On November 21, 2006, we amended our certificate of incorporation to change our name to Carrols Restaurant Group, Inc.
Industry
The Restaurant Market
According to Technomic, in 2010 total restaurant industry revenues in the United States were approximately $361.1 billion. Sales in the overall U.S. restaurant industry as reported by Technomic have increased from $257.8 billion in 2000 to $361.1 billion in 2010, which reflects a compound annual growth rate of 3.4% from 2000 through 2010. The rate of growth of sales in the overall U.S. restaurant industry from 2000 through 2010 may not be indicative of future growth and there can be no assurance that sales in the overall U.S. restaurant industry will grow at a similar rate in the future or at all. In 2010, 48% of food dollars were spent on food away from home and demand continues to outpace at-home dining, with food away from home projected to surpass at-home dining in 2015 according to the U.S. Department of Agriculture.
nfrastructure in Place for Growth. We believe that our operating disciplines, seasoned management team, including real estate professionals responsible for site selection, and marketing and product development capabilities, supported by our corporate and restaurant management information systems and comprehensive training and development programs, will support significant expansion. We expect to leverage our significant investment in corporate infrastructure as we grow our business.
Experienced Management Team. We believe that our senior management team’s extensive experience in the restaurant industry and its long and successful history of developing, acquiring, integrating and operating quick-service and quick-casual restaurants provides us with a competitive advantage. Our Burger King operations are overseen by our Chief Executive Officer who has nearly 40 years of Burger King and quick-service restaurant experience and five Regional Directors that have an average of 28 years of Burger King restaurant experience. Forty district managers that support the Regional Directors have an average of over 22 years of restaurant management experience in the Burger King system.
We believe we have the following additional competitive strengths specific to Fiesta Restaurant Group’s Pollo Tropical and Taco Cabana restaurants:
Differentiated Menu Offerings with Broad Appeal. Both of our company owned brands offer differentiated menu items that we believe have broad consumer appeal, attract a more diverse customer base and increase customer frequency. Pollo Tropical’s menu offers dishes inspired from multiple regions throughout the Caribbean, including our featured grilled chicken marinated in our proprietary blend of tropical fruit juices and spices. Taco Cabana’s menu offers favorites such as sizzling fajitas served hot on the skillet and other authentic Mexican dishes. We frequently enhance our menu with seasonal offerings and new menu items to provide variety to our guests and to address changes in consumer preferences such as sandwiches at our Pollo Tropical restaurants and brisket tacos and shrimp tampico at our Taco Cabana restaurants. Additionally, our menu includes a number of options to address consumers’ increasing focus on healthy eating.
Leading Quick-Casual Brands with Attractive Value Proposition. We believe that our brands are positioned to benefit from growing consumer demand for quick-casual restaurants because of food quality, value, differentiation of flavors and the increasing acceptance of ethnic foods. In addition, we believe our recent initiatives to enhance our Pollo Tropical and Taco Cabana restaurants in certain existing and new markets provide our customers an elevated quick-casual experience while better positioning our brands for successful and sustainable future growth. We believe our fresh, quality food at affordable price points provides customers a compelling value proposition, enabling us to benefit from consumers’ desire for a more value oriented quick-casual alternative. We believe that the inviting atmosphere, “made from scratch” menu items and open display cooking format of our restaurants offer customers a quality food and dining experience comparable to casual dining, but with the convenience and affordability similar to that of quick-service restaurants.
Strong Restaurant Level Economics and Operating Metrics. Our comparable restaurant sales increased 9.9% and 3.7% at our Pollo Tropical and Taco Cabana restaurants, respectively, for the year ended December 31, 2011. Based on industry data from Technomic, we believe that the average annual sales at our company-owned restaurants for the year ended December 31, 2011 of approximately $2,287,000 and $1,690,000 for Pollo Tropical and Taco Cabana, respectively, are among the highest in the quick-casual segment. We believe that the average annual sales at our company-owned restaurants and our strong operating margins generate unit economics and returns on invested capital which will enable us to support new unit growth.
Well Positioned to Capitalize on Long-Term Population Growth in Markets Served by Our Fiesta Restaurant 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 8.7% from 2010 to 2020 and the population in Florida and Texas is forecasted to grow by 21.6% and 16.2%, respectively, during that same time period. However, there can be no assurance that we will be able to benefit from any long-term population growth in Florida and Texas.
Well Positioned to Continue to Benefit From the Growth of the Hispanic Population in the United States. We expect sales from our Pollo Tropical and Taco Cabana restaurants to benefit from the growth of the U.S. Hispanic population, which is projected by the U.S. Census Bureau to grow at a faster rate than the national average. 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 16.3% of the total U.S. population in 2010 to 23.7% by 2030. We believe that the continued growth of the Hispanic population has contributed to the increased popularity and acceptance of Hispanic food in the United States by non-Hispanic consumers. However, there can be no assurance that we will be able to benefit from any growth of the Hispanic population in the United States.
Our Large Number of Company-Owned Restaurants Enable us to Effectively Manage Our Brands. Our restaurants in the United States are substantially company-owned and we therefore exercise control over the day-to-day operations of our restaurants unlike many of our competitors that are largely comprised of independent franchisees. Consequently, our success does not depend on our control of our franchisees, or their support of our marketing programs, new product offerings, strategic initiatives or new restaurant development strategies. In addition, because our Pollo Tropical and Taco Cabana restaurants are primarily company-owned, we believe we are better able to provide customers with a more consistent experience relative to competing brands that utilize franchisee-operated restaurants.
Experienced Management Team. We believe that our senior management team’s extensive experience in the restaurant industry and its history of developing and operating quick-service and quick-casual restaurants provides us with a competitive advantage. Furthermore, our executive management team is supported by deep brand-level operating teams with extensive experience. Fiesta Restaurant Group’s Chief Executive Officer, Tim Taft, has been with us since August 2011 and has over 30 years of experience in the restaurant and hospitality industry. Our Executive Vice Presidents of Pollo Tropical and Taco Cabana have been with us for over 30 years and in their current positions since 2003 and 2002, respectively. We believe that the breadth of industry experience of our management team and their longstanding experience with our restaurant brands provide us with a competitive advantage. We believe that our operating disciplines, seasoned management team, including real estate professionals responsible for site selection, and marketing and product development capabilities, supported by our management information systems and comprehensive training and development programs, will support our expansion.
Business Strategy
Our primary business strategies are as follows:
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Separation of Business into Two Public Companies. We are in the process of splitting our business into two separate, publicly traded companies through the tax-free spin-off of the common stock of Fiesta Restaurant Group to our stockholders in the form of a dividend. Fiesta Restaurant Group will own and operate the Pollo Tropical and Taco Cabana businesses. We will continue to own and operate our franchised Burger King restaurants. We believe that the separation will enable each company to better focus on its respective opportunities as well as to pursue its own distinct plan and growth strategy. We also believe that a separation will better position each company to align its business with its respective shareholders’ objectives. Although we expect to complete the spin-off in April 2012, there can be no assurance that the spin-off will be completed within such time period or at all.
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Increase Comparable Restaurant Sales. We believe that our Burger King restaurants have the potential to benefit from BKC’s new marketing initiatives approach and introduction of new and enhanced menu items in its efforts to reach out to a broader consumer base. We intend to grow sales at our Pollo Tropical and Taco Cabana restaurants by attracting new customers and increasing customer frequency by continuing to develop new menu offerings and enhance the effectiveness of our advertising and promotional programs, further capitalizing on attractive industry and demographic trends and enhancing the quality of the customer experience at our restaurants.
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Improve Income from Operations and Leverage Existing Infrastructure. We believe we have opportunities to increase the number of our Burger King restaurant that we operate through acquisitions which will enable us to realize certain benefits from economies of scale, including leveraging our existing infrastructure as we grow. We also believe that our large restaurant base, skilled management team, sophisticated management information and operating systems and training and development programs support our strategy of enhancing operating efficiencies at restaurants which we may acquire. Our operating systems allow us to effectively manage restaurant labor and food costs, leverage supervision of our restaurant operations and promote consistent application of operating controls at each of our restaurants.
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Enhance Our Brand Positioning. We have implemented 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 quick-casual segment while appealing to a broader demographic. Our restaurant enhancements 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 free table service, hand held menus, Wi-Fi, new menu items as well as real plates and silverware. We believe our elevated Pollo Tropical and Taco Cabana restaurants further differentiate us from price-driven, quick-service restaurants. As of Janaury 1, 2012, we had upgraded a total of 45 Taco Cabana restaurants in Texas which included 34 locations in the Dallas market, eight in the Austin market, and one location each in College Station, Corpus Christi and Temple. During 2012, as a continuation of our brand positioning efforts, we plan to upgrade a total of 37 restaurants including the remaining restaurants in our Austin market, twelve restaurants in our San Antonio market and eight restaurants in our Houston market. The cost of the restaurant enhancements for our Taco Cabana restaurants has been and are expected to be approximately $200,000 to $300,000 per restaurant, respectively. As of January 2, 2011, we had upgraded a total of twelve Pollo Tropical restaurants. Although we continue to reinvest in our core markets through remodeling certain locations
to maintain a competitive image, we do not anticipate any upgrades to our existing Pollo Tropical restaurants in 2012. The cost of the restaurant enhancements for our Pollo Tropical restaurants has generally ranged between $150,000 to $200,000.
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Develop New Pollo Tropical and Taco Cabana Restaurants Within and Outside or Our Existing Markets. We believe that we have opportunities to develop additional Pollo Tropical and Taco Cabana restaurants within our existing 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. By increasing the number of restaurants we operate in a particular market, we believe that we can increase brand awareness and effectively leverage our field supervision, corporate infrastructure and marketing initiatives. We currently anticipate opening a total of ten to twelve new restaurants in 2012.
Pollo Tropical has developed an elevated format which we believe will permit it to be accepted as a general market concept and broaden its target audience. This format includes a more upscale décor, an elevated service platform where food is ordered and then brought to the guest at the table, new menu offerings including sangria and wine, and numerous other enhancements. Pollo Tropical has recently opened two restaurants in Jacksonville, Florida, and one restaurant in Atlanta, Georgia utilizing this format and we believe it will serve as the model for Pollo Tropical’s expansion outside its core Florida markets. Similarly, we believe we have an opportunity to develop an elevated format for our Taco Cabana restaurants that will enable us to expand the concept outside our core Texas markets within the next two years.
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Franchise Our Pollo Tropical Restaurants Internationally and Expand Domestic Non-Traditional Licensing. We believe that there are a number of markets outside the United States with the appropriate demographics and consumer preference to support additional franchising of the Pollo Tropical brand. 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 and sports arenas. Internationally, our franchisees are currently operating or have development rights to open Pollo Tropical restaurants under multi-unit development agreements in The Bahamas, Ecuador, Puerto Rico, Trinidad & Tobago, Panama, Aruba, Bonaire, Curacao, Venezuela, Honduras and Costa Rica. Since restaurant development in foreign jurisdictions requires certain local knowledge and expertise that we do not necessarily possess, we utilize franchising to expand in international markets. This permits us to leverage the local knowledge and expertise of our franchisees and also provides a lower cost method of penetrating foreign markets. In addition to certain minimum financial requirements, the criteria for our franchisees includes individuals or entities that have multi unit hospitality industry experience and have demonstrated local commercial real estate development experience. We believe that there are significant opportunities to develop Pollo Tropical restaurants in additional international markets and are seeking new multi-unit franchisees and licensees who meet our qualification criteria in strategically targeted markets.
CEO BACKGROUND
Clayton E. Wilhite has served as a Director since July 1997. Since January 1998, Mr. Wilhite has been with CFI Group Worldwide LLC, and was Managing Partner of its North American Group from May 1998 to December 2004 and Managing Partner of CFI Worldwide LLC from January 2005, until his retirement on December 31, 2007. Mr. Wilhite continues to be a Senior Partner and shareholder of CFI Group Worldwide LLC. From September 1998 through December 2008, Mr. Wilhite served on the board of directors of CFI Group Worldwide LLC, an international management consulting firm specializing in measuring customer satisfaction. Between 1996 and 1998, he was the Chairman of Thurloe Holdings, L.L.C. From August 1996 through our acquisition of Pollo Tropical, Inc., Mr. Wilhite served on the board of directors of Pollo Tropical, Inc. Before 1996, Mr. Wilhite was with the advertising firm of D’Arcy Masius Benton & Bowles, Inc. having served as its Vice Chairman from 1995 to 1996, as President of DMB&B/North America from 1988 to 1995, and as Chairman and Managing Director of DMB&B/St. Louis from 1985 to 1988.
Mr. Wilhite brings valuable leadership, and strategic skills from 20 years as a CEO or COO in the management consulting, consumer marketing and advertising agency businesses. In addition, having served on our board since 1997 and on the Pollo Tropical board prior to its acquisition by us, he brings consumer based insights to our strategic planning process.
Joel M. Handel has served as a Director since December 14, 2006, the date of our initial public offering on which our Registration Statement on Form S-1 relating to the initial public offering of our common stock (the “ IPO ”) was declared effective by the SEC (the “ Effective Time ”). Since November 2008, Mr. Handel has been a partner in the law firm Seyfarth Shaw LLP. From 2001 until joining Seyfarth Shaw, Mr. Handel was a partner in the law firm of Brown Raysman Millstein Felder & Steiner LLP which merged with and became a part of Thelen Reid Brown Raysman & Steiner on December 1, 2006. From 1976 to 2001 he was managing partner of the law firm of Baer Marks & Upham LLP.
Mr. Handel has over 30 years experience as a partner in several major law firms and has a formal background and training in accounting and tax law. He has represented numerous public corporations and has been involved with numerous mergers and acquisitions and other corporate transactions and has significant expertise related to the business, financial, and legal issues facing public companies.
MANAGEMENT DISCUSSION FROM LATEST 10K
Company Overview
We are one of the largest restaurant companies in the United States based on revenues, operating three restaurant brands in the quick-casual and quick-service restaurant segments with 547 restaurants located in 17 states as of January 1, 2012. We have been operating restaurants for more than 50 years. Through our indirect wholly-owned subsidiary, Fiesta Restaurant Group, we own and operate two restaurant brands, Pollo Tropical and Taco Cabana, which we acquired in 1998 and 2000, respectively. We are also the largest Burger King franchisee, based on the number of restaurants, and have operated Burger King restaurants since 1976. As of January 1, 2012, our company-owned restaurants included 91 Pollo Tropical restaurants and 158 Taco Cabana restaurants, and we owned and operated 298 Burger King restaurants under franchise agreements.
We are franchising our Pollo Tropical restaurants and as of January 1, 2012 we had 31 franchised restaurants located in Puerto Rico, Ecuador, Honduras, Trinidad, the Bahamas, Venezuela and on college campuses in Florida. We also have agreements for the future development of franchised Pollo Tropical restaurants in Panama, Tobago, Aruba, Curacao, Bonaire and Costa Rica. Although we are not actively franchising our Taco Cabana restaurants, we had five Taco Cabana franchised restaurants at January 1, 2012 located in the United States.
The following is an overview of the key financial measures discussed in our results of operations:
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Restaurant sales consist of food and beverage sales, net of discounts, at our company-owned and operated restaurants. Restaurant sales are influenced by changes in comparable restaurant sales, menu price increases, new restaurant openings and closures of restaurants. Restaurants are included in comparable restaurant sales after they have been open for 12 months for our Burger King restaurants and 18 months for our Pollo Tropical and Taco Cabana restaurants. For comparative purposes, the calculation of the changes in comparable restaurant sales is based on a 52-week year. For purposes of calculating the changes in comparable restaurant sales for 2009, a 53-week year, we have excluded restaurant sales for the extra week of 2009.
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Cost of sales consists of food, paper and beverage costs including packaging costs, less purchase discounts. Cost of sales is generally influenced by changes in commodity costs, the sales mix of items sold and the effectiveness of our restaurant-level controls to manage food and paper costs. Key commodities for our Pollo Tropical and Taco Cabana restaurants, including chicken and beef, are generally purchased under contracts for future periods up to one year.
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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 benefits are subject to inflation, including minimum wage increases and increased costs for health insurance, workers’ compensation insurance and state unemployment insurance.
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Restaurant rent expense includes base rent and contingent rent on our leases characterized as operating leases, reduced by the amortization of gains on sale-leaseback transactions.
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Other restaurant operating expenses include all other restaurant-level operating costs, the major components of which are royalty expenses for our Burger King restaurants, utilities, repairs and maintenance, real estate taxes and credit card fees.
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Advertising expense includes all promotional expenses including television, radio, billboards and other media for our Pollo Tropical and Taco Cabana restaurants and advertising payments based on a percentage of sales as required under our franchise agreements for our Burger King restaurants.
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General and administrative expenses are comprised primarily of (1) salaries and expenses associated with corporate and administrative functions that support the development and operations of our restaurants, (2) legal, auditing and other professional fees, including costs in connection with the spin-off of Fiesta Restaurant Group, and (3) stock-based compensation expense.
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Adjusted Segment EBITDA , which is the measure of segment profit or loss used by our chief operating decision maker for purposes of allocating resources to our segments and assessing their performance, is defined as earnings attributable to the applicable segment before interest, income taxes, depreciation and amortization, impairment and other lease charges, stock-based compensation expense, other income and expense and gains and losses on the extinguishment of debt. Adjusted Segment EBITDA may not be necessarily comparable to other similarly titled captions of other companies due to differences in methods of calculation. Adjusted Segment EBITDA for our Burger King restaurants includes general and administrative expenses related directly to the Burger King segment as well as the expenses associated with administrative support to all three of our segments for executive management, information systems and certain accounting, legal and other administrative functions.
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Depreciation and amortization primarily includes the depreciation of fixed assets, including equipment, owned buildings and leasehold improvements utilized in our restaurants, depreciation of assets under lease financing obligations and the amortization of Burger King franchise rights and franchise fees.
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Impairment and other lease charges are determined through our assessment of the recoverability of property and equipment and intangible assets by determining whether the carrying value of these assets can be recovered over their respective remaining lives through undiscounted future operating cash flows. A potential impairment charge is evaluated whenever events or changes in circumstances indicate that the carrying amounts of these assets may not be fully recoverable. Lease charges are recorded for our obligations under the related leases for closed locations net of estimated sublease recoveries.
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Interest expense consists primarily of borrowings under our senior secured credit facilities, interest expense associated with Carrols’ 9% Senior Subordinated Notes due 2013 (the “Carrols Notes”) which were repurchased in a tender offer or redeemed in the third quarter of 2011, the amortization of deferred financing costs, imputed interest expense on leases entered into in connection with sale-leaseback transactions which are accounted for as lease financing obligations and any gains and losses from the settlement of lease financing obligations. Subsequent to August 5, 2011, interest expense also includes interest associated with the issuance of $200 million of Fiesta Restaurant Group’s 8.875% Senior Secured Second Lien Notes due 2016 (the “Fiesta Notes”).
Recent and Future Events Affecting our Results of Operations
Spin-off of Fiesta Restaurant Group, Inc.
On February 24, 2011 we announced our intention to split our business into two separate, publicly-traded companies through the tax-free spin-off of the common stock of Fiesta Restaurant Group to our stockholders in the form of a pro rata dividend. Upon the consummation of the spin-off, Fiesta Restaurant Group would continue to own and operate our Pollo Tropical and Taco Cabana businesses and we would continue to own and operate our franchised Burger King restaurants through our subsidiaries Carrols and Carrols LLC.
We believe that the proposed spin-off will enable each company to better focus on its respective opportunities as well as to pursue its own distinct operating plan and growth strategy including potential acquisition opportunities in the Burger King system. The completion of the spin-off remains conditioned on, among other things, final approval of our Board of Directors, receipt of a favorable private letter tax ruling from the IRS, which has been received, the effectiveness of Fiesta Restaurant Group’s Registration Statement on Form 10 filed with the SEC with respect to the registration of its common stock under the Exchange Act and final listing approval of the Fiesta Restaurant Group common stock on the NASDAQ Global Market. Although we expect to complete the spin-off in April 2012, there can be no assurance that we will complete the spin-off by then or at all.
Refinancing of Outstanding Indebtedness
On August 5, 2011, we completed a refinancing of our existing indebtedness. Carrols LLC and Fiesta Restaurant Group each entered into new and independent financing arrangements. The proceeds from these financings were used to repay all indebtedness outstanding under Carrols senior credit facility and the Carrols Notes, as well as to pay all related fees and expenses. Excess cash from the financings was approximately $9.5 million and was available to us for general corporate purposes, including the disbursement of funds prior to the spin-off to Fiesta Restaurant Group and Carrols LLC.
Fiesta Restaurant Group sold $200 million of Fiesta Notes and entered into a $25 million senior secured revolving credit facility which was undrawn at closing. Carrols LLC entered into an $85 million senior secured credit facility including term loan borrowings of $65 million and a $20 million revolving credit facility which was undrawn at closing. Proceeds from these borrowings were used to repay approximately $80.2 million outstanding under Carrols’ senior credit facility, to repurchase or redeem $165.0 million of the Carrols Notes, and to pay accrued interest and related fees and expenses. Total interest expense in 2011 increased by $2.3 million as a result of these transactions.
Future Restaurant Closures
We evaluate the performance of our Burger King restaurants on an ongoing basis including an assessment of the current and future operating results of the restaurant, and in relation to Burger King franchise agreement renewals, the cost of required capital improvements. We may elect to close restaurants based on such evaluation. In 2011, we closed eight Burger King restaurants, not including restaurants relocated within the same market area. We currently anticipate that we will close an additional three Burger King restaurants in 2012, excluding any Burger King restaurants which we may close and relocate.
We also closed two underperforming Pollo Tropical restaurants and one underperforming Taco Cabana restaurant in 2011. We currently anticipate the closing of two to four Pollo Tropical and Taco Cabana restaurants in 2012.
We do not believe that the future impact on our consolidated results of operations from such restaurant closures will be material, although there can be no assurance in this regard. Our determination of whether to close restaurants in the future is subject to further evaluation and may change.
Executive Summary—Operating Performance for the Year Ended December 31, 2011
Total revenues for the year ended December 31, 2011 were $822.5 million as compared to $796.1 million in the prior year. Revenues from Fiesta Restaurant Group increased 8.2% to $475.0 million from $439.1 million in 2010 while revenues from our Burger King restaurants decreased 2.7% to $347.5 million from $357.1 million in 2010. Comparable restaurant sales increased 9.9% at our Pollo Tropical restaurants, increased 3.7% at our Taco Cabana restaurants and decreased 1.4% at our Burger King restaurants. The comparable restaurant sales increase at our Pollo Tropical restaurants was due to higher customer traffic and, to a lesser extent, an increase in average check. The comparable restaurant sales increase at our Taco Cabana restaurants was driven by an increase in average check while the decrease at our Burger King restaurants was due to lower customer traffic, partially offset by an increase in average check.
Restaurant operating margins were negatively impacted in 2011 by higher food costs at each of our three restaurant brands as cost of sales, as a percentage of total restaurant sales, increased 1.0% to 31.3% compared to 2010. Commodity cost increases were patially offset by favorable sales mix changes at our Burger King restaurants as well as menu price increases taken later in 2010 and in 2011. As a percentage of total restaurant sales, restaurant wages and related expenses decreased to 29.0% in 2011 from 29.6% in 2010 due to the effect of higher sales volumes on fixed labor costs at our Pollo Tropical and Taco Cabana restaurants and from productive labor efficiencies at our Burger King restaurants. Operating margins were favorably impacted by lower utility costs which, as a percentage of total restaurant sales, decreased to 3.5% in 2011 from 3.7% in 2010.
General and administrative expenses increased to $57.1 million from $51.0 million in 2010 due primarily to higher administrative bonus accruals, higher stock-based compensation expense and higher legal and professional fees including costs and related expenses incurred in connection with the planned spin-off of Fiesta Restaurant Group.
Interest expense increased $2.2 million in 2011 to $21.0 million due primarily to higher debt levels from our refinancing our indebtedness in the third quarter of 2011. We also recorded a loss of $2.5 million on extinguishment of debt in connection with the refinancing.
Our effective income tax rate decreased to 27.2% in 2011 from 32.6% in 2010 due primarily to an increase in employment related tax credits in 2011.
As a result of the above, net income in 2011 decreased to $11.2 million, or $0.51 per diluted share, compared to $11.9 million, or $0.55 per diluted share in 2010. Both years included certain charges which in the aggregate reduced earnings by $0.25 per diluted share in 2011 and $0.21 per diluted share in 2010. In 2011, such charges included a $2.5 million charge related to the early extinguishment of debt, $4.0 million in impairment and other lease charges, $1.7 million in spin-off costs and related expenses, offset by $0.6 million in insurance gains and net gains from sales of restaurant properties. In 2010, there were impairment and other lease charges of $7.3 million and an insurance gain of $0.4 million.
Restaurant Sales. Total restaurant sales in 2011 increased 3.3% to $820.8 million from $794.6 million. Restaurant sales for Fiesta Restaurant Group were $473.2 million and increased 8.2% from 2010.
Pollo Tropical restaurant sales increased 11.9% to $208.1 million due primarily to an increase in comparable restaurant sales of 9.9% resulting from an increase in customer traffic of approximately 8.0% and a 1.9% increase in average check. The effect of menu price increases in 2011 was 1.5%. In addition, four restaurants opened since the beginning of 2010 contributed $5.9 million in additional sales in 2011.
Taco Cabana restaurant sales increased 5.4% to $265.1 million due primarily to a 3.7% increase in comparable restaurant sales resulting from an increase in average check of 4.4% compared to 2010. The effect of menu price increases in 2011 was 2.9%. In addition, five restaurants opened since the beginning of 2010 contributed $5.6 million in additional sales in 2011.
Burger King restaurant sales decreased 2.7% in 2011 to $347.5 million due to a decrease in comparable restaurant sales of 1.4% from lower customer traffic and the closure, excluding relocations, of fifteen Burger King restaurants since the beginning of 2010. The decrease in customer traffic was partially offset by an increase in average check of 6.6% from sales mix changes and the effect of menu price increases in 2011 of 4.3%.
Pollo Tropical Operating Costs and Expenses (percentages stated as a percentage of Pollo Tropical restaurant sales). Pollo Tropical cost of sales increased to 33.4% in 2011 from 32.3% in 2010 due primarily to higher commodity prices (1.4%) including chicken (0.8%), and fuel surcharges, partially offset by favorable menu item sales mix shifts and the effect of menu price increases. Pollo Tropical restaurant wages and related expenses decreased to 23.6% in 2011 from 24.7% in 2010 due primarily to the effect of higher sales volumes on fixed labor costs and by lower workers compensation claim costs (0.5%). Pollo Tropical other restaurant operating expenses decreased to 12.5% in 2011 from 13.0% in 2010 due primarily to lower real estate taxes (0.3%), lower utility costs and the effect of higher sales volumes on other fixed operating costs. Pollo Tropical advertising expense was 2.8% in both 2011 and 2010.
Taco Cabana Operating Costs and Expenses (percentages stated as a percentage of Taco Cabana restaurant sales). Taco Cabana cost of sales increased to 31.4% in 2011 from 29.9% in 2010 due primarily to higher commodity prices (2.1%) including beef fajita price increases (0.9%) partially offset by the effect of menu price increases taken since the beginning of 2010. Taco Cabana restaurant wages and related expenses decreased to 30.2% in 2011 from 30.5% in 2010 due primarily to the effect of higher sales volumes on fixed labor costs and lower medical claim costs (0.3%). Taco Cabana other restaurant operating expenses decreased to 13.5% in 2011 from 14.3% in 2010 due primarily to lower utility costs (0.4%), the reduction of operating supply costs and the effect of higher sales volumes on other fixed operating costs. Taco Cabana advertising expense decreased slightly to 4.0% in 2011 from 4.1% in 2010.
Burger King Operating Costs and Expenses (percentages stated as a percentage of Burger King restaurant sales). Burger King cost of sales increased to 29.9% in 2011 from 29.5% in 2010 due primarily to increases in commodity costs (2.4%) including beef costs (1.2%) and higher promotional discounting (0.3%) which were partially offset by the effect of menu price increases and a favorable sales mix primarily from the discontinuation of the Buck Double in 2011. Burger King restaurant wages and related expenses decreased to 31.4% in 2011 from 31.5% in 2010 due to leveraging management and productive labor efficiencies and lower restaurant level bonus accruals. These factors were substantially offset by the effect of lower sales volumes on fixed labor costs and higher workers compensation and medical claim costs (0.3%). Burger King other restaurant operating expenses increased to 15.4% in 2011 from 15.3% in 2010 due primarily to the effect of lower sales volumes on fixed operating costs. Burger King advertising expense was 4.2% in both 2011 and 2010.
Consolidated Restaurant Rent Expense . Restaurant rent expense, as a percentage of total restaurant sales, decreased to 5.9% in 2011 from 6.1% in 2010 due primarily to the effect of sales increases at our Pollo Tropical and Taco Cabana restaurants on fixed rental costs.
Consolidated General and Administrative Expenses. General and administrative expenses increased $6.1 million in 2011 to $57.1 million and, as a percentage of total restaurant sales, increased to 7.0% from 6.4% in 2010 due primarily to an increase of $2.4 million in performance-based administrative bonus accruals, higher stock-based compensation expense of $1.1 million and higher legal and professional fees including $1.7 million of costs and related expenses incurred in connection with the planned spin-off of Fiesta Restaurant Group.
Adjusted Segment EBITDA. As a result of the factors above, Adjusted Segment EBITDA for our Pollo Tropical restaurants increased to $36.8 million in 2011 from $30.3 million in 2010. Adjusted Segment EBITDA for our Taco Cabana restaurants increased to $27.5 million in 2011 from $27.4 million in 2010. Adjusted Segment EBITDA for our Burger King restaurants decreased to $14.4 million in 2011 from $19.8 million in 2010.
Adjusted Segment EBITDA for our Burger King segment includes general and administrative expenses related directly to the Burger King segment as well as expenses associated with administrative support to our Pollo Tropical and Taco Cabana segments for executive management, information systems and certain accounting, legal and other administrative functions. For the years ended December 31, 2011 and 2010, the administrative support expenses included in the Burger King segment provided to Pollo Tropical were $5.0 million and $4.0 million, respectively, and the administrative support expenses provided to Taco Cabana were $6.1 million and $5.1 million, respectively.
Depreciation and Amortization. Depreciation and amortization expense increased to $33.5 million in 2011 from $32.5 million in 2010 due primarily from our capital expenditures in 2011 of $50.6 million.
Impairment and Other Lease Charges . In 2011 we recorded total impairment and other lease charges of $4.0 million which included other lease charges of $1.2 million associated with five closed Pollo Tropical restaurants, $0.2 million of lease charges for two closed Taco Cabana restaurants, $1.3 million of impairment charges for certain underperforming Burger King restaurants and a $1.3 million impairment charge for an underperforming Pollo Tropical restaurant.
In 2010 we recorded total impairment and other lease charges of $7.3 million which included impairment charges of $3.9 million for four underperforming Pollo Tropical restaurants, $1.4 million for two underperforming Taco Cabana restaurants and $0.7 million for certain Burger King restaurants. We also recorded other lease charges of $0.7 million for non-operating Pollo Tropical restaurant properties and $0.5 million for non-operating Taco Cabana restaurant properties.
Interest Expense. Total interest expense increased $2.2 million to $21.0 million in 2011 due primarily to higher debt balances resulting from our refinancing in the third quarter of 2011. The weighted average interest rate on our long-term debt, excluding lease financing obligations, for 2011 increased to 6.9% from to 6.1% in 2010 due primarily to the composition of our consolidated indebtedness after our 2011 refinancing. Interest expense on lease financing obligations was $1.0 million in both 2011 and 2010.
Provision for Income Taxes. The effective tax rate for 2011 decreased to 27.2% from 32.6% in 2010 due primarily from higher Work Opportunity Tax Credits and the HIRE act retention tax credit in 2011. In addition, The Federal income tax rate in 2011, based on our consolidated taxable income level, was 34% compared to 35% in 2010.
Net Income. As a result of the foregoing, net income was $11.2 million in 2011 compared to $11.9 million in 2010.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
Company Overview
We are one of the largest restaurant companies in the United States and have been operating restaurants for more than 50 years. With 297 Burger King restaurants as of April 1, 2012, we are the largest Burger King franchisee, based on number of restaurants, and have operated Burger King restaurants since 1976. Our former indirect wholly-owned subsidiary, Fiesta Restaurant Group, Inc. (“Fiesta”), which was spun off by us to our stockholders on May 7, 2012, owns and operates the Pollo Tropical and Taco Cabana restaurant brands. As of April 1, 2012, Fiesta owned and operated restaurants included 86 Pollo Tropical restaurants and 157 Taco Cabana restaurants, and with our 297 Burger King restaurants we owned an operated a total of 540 restaurants in 17 states.
Fiesta is franchising Pollo Tropical restaurants primarily internationally and, as of April 1, 2012, had 33 franchised restaurants located in Puerto Rico, Ecuador, Honduras, the Bahamas, Trinidad, Venezuela, Costa Rica and on college campuses in Florida. Fiesta also has agreements for the future development of franchised Pollo Tropical restaurants in Panama, Tobago, Aruba, Curacao and Bonaire. Although Fiesta is not actively franchising Taco Cabana restaurants, it had five Taco Cabana franchised restaurants as of April 1, 2012 located in the United States.
Recent and Future Events Affecting our Results of Operations
Acquisition of Burger King Restaurants
On March 26, 2012, we and Carrols LLC, entered into a purchase agreement with BKC to purchase 278 of BKC’s company-owned restaurants located in Ohio, Indiana, Kentucky, Pennsylvania, North Carolina, South Carolina and Virginia. As consideration for this acquisition, we will (i) issue to BKC shares of our Series A Convertible Preferred Stock (ii) pay cash payments to BKC at the closing of the transaction of approximately $2.8 million (subject to adjustment) for cash on hand and inventory at restaurants to be acquired and (iii) pay other cash payments of approximately $13.3 million with approximately $9.6 million to be paid at closing of the transaction with the balance to be paid over five years by Carrols LLC to BKC. The cash payment of approximately $13.3 million is for refranchising fees and for BKC’s assignment of its right of first refusal on franchisee restaurant transfers in 20 states pursuant to an operating agreement to be entered into at the closing of the transaction. The Series A Convertible Preferred Stock issued to BKC will equal a 28.9% equity ownership interest in Carrols Restaurant Group, subject to restrictions limiting the conversion of the Series A Convertible Preferred Stock to an amount of shares not to exceed 19.9% of the outstanding shares of our common stock as of the date of issuance (the “Issuance Limitation”). Pursuant to the purchase agreement, the removal of the Issuance Limitation will be subject to obtaining the approval of our stockholders at our next annual meeting after the closing of the acquisition or at subsequent meetings, if necessary, until stockholder approval is obtained.
Carrols LLC will also enter into new franchise agreements pursuant to the purchase and operating agreements and enter into leases with BKC for all of the acquired restaurants, including leases for 81 restaurants owned in fee by BKC and subleases for 197 restaurants under terms substantially the same as BKC’s underlying leases for those properties. Pursuant to the operating agreement, Carrols LLC will also agree to remodel 455 Burger King restaurants to BKC’s 20/20 restaurant image, including 57 restaurants in 2012, 154 restaurants in 2013, 154 restaurants in 2014 and 90 restaurants in 2015.
The consummation of the acquisition is subject to certain conditions, including, among other things, (a) the completion of a refinancing sufficient for Carrols LLC to repay its outstanding indebtedness under its senior secured credit facility, to pay amounts due to BKC pursuant to the purchase and operating agreements, and with cash generated from operations, to pay for our obligations in connection with an agreed upon remodeling plan, (b) the receipt of third party consents and (c) other customary closing conditions. We anticipate that the acquisition will be completed in the second quarter of 2012, although there can be no assurance that the acquisition will be completed within such period or at all.
Spin-off of Fiesta Restaurant Group, Inc.
On April 16, 2012, our board of directors approved the spin-off of Fiesta Restaurant Group, which through its subsidiaries, owns and operates the Pollo Tropical and Taco Cabana restaurant brands. We will continue to own and operate our franchised Burger King restaurants through our subsidiaries Carrols and Carrols LLC. In connection with the spin-off, on April 24, 2012, we and Carrols entered into several agreements with Fiesta Restaurant Group that govern our post spin-off relationship with Fiesta Restaurant Group, including a Separation and Distribution Agreement, Tax Matters Agreement, Employee Matters Agreement and Transition Services Agreement.
Fiesta Restaurant Group has filed with the Securities and Exchange Commission (the “SEC”) a Form 10 registration statement, File No. 001-35373, as amended (the “Registration Statement”), which includes as an exhibit an information statement which describes the spin-off. This Registration Statement, which registered the common stock of Fiesta Restaurant Group under the Securities Exchange Act of 1934, as amended, was declared effective by the SEC on April 25, 2012.
On May 7, 2012, we completed the spin-off of Fiesta Restaurant Group in the form of a pro rata dividend of all of the issued and outstanding common stock of Fiesta Restaurant Group to Carrols Restaurant Group’s stockholders whereby each stockholder of Carrols Restaurant Group’s common stock of record on April 26, 2012 received one share of Fiesta Restaurant Group common stock for every one share of Carrols Restaurant Group common stock held. As a result of the spin-off, Fiesta Restaurant Group is now an independent company whose common stock is traded on The NASDAQ Global Select Market under the symbol “FRGI.” Carrols Restaurant Group’s common stock will continue to trade on The NASDAQ Global Market under the symbol “TAST.”
We believe that the spin-off will enable each company to better focus on its respective opportunities and to pursue its own distinct operating plan and growth strategy. Beginning in the second quarter of 2012 the historical operating results of Fiesta Restaurant Group prior to the spin-off will be included in our operating results as earnings from discontinued operations.
Refinancing of Outstanding Indebtedness
On August 5, 2011, we completed a refinancing of our existing indebtedness. Carrols LLC and Fiesta Restaurant Group each entered into new and independent financing arrangements. The proceeds from these financings were used to repay all indebtedness outstanding under Carrols senior credit facility and the Carrols Notes, as well as to pay all related fees and expenses. Excess cash proceeds from the financings were approximately $9.5 million, and in the first quarter of 2012 we transferred $2.5 million of these proceeds to Fiesta Restaurant Group.
Fiesta Restaurant Group sold $200 million of Fiesta Notes and entered into a $25 million senior secured revolving credit facility which was undrawn at closing. Carrols LLC entered into an $85 million senior secured credit facility including term loan borrowings of $65 million and an undrawn $20 million revolving credit facility. Proceeds from these borrowings were used to repay approximately $80.2 million outstanding under Carrols’ senior credit facility, to repurchase or redeem $165.0 million of the Carrols Notes and to pay accrued interest and related fees and expenses.
Future Restaurant Closures
We evaluate the performance of our restaurants on an ongoing basis including an assessment of the current and future operating results of the restaurant, and in relation to Burger King franchise agreement renewals, the cost of required capital improvements. We may elect to close restaurants based on such evaluation. In the first quarter of 2012 we closed one Burger King restaurant and in 2011 we closed eight Burger King restaurants, not including one restaurant relocated within the same market area. We currently anticipate that we will close one additional Burger King restaurant in 2012.
In the first quarter of 2012, we closed our five Pollo Tropical restaurants in New Jersey and one underperforming Taco Cabana restaurant. Two of the five Pollo Tropical restaurant location’s assets were previously impaired as of January 1, 2012 and have a base lease term ending in 2012. We also closed two underperforming Pollo Tropical restaurants and one underperforming Taco Cabana restaurant in 2011. We currently do not anticipate closing any additional Pollo Tropical and Taco Cabana restaurants in 2012.
We do not believe that the future impact on our consolidated results of operations from such restaurant closures will be material, although there can be no assurance in this regard. Our determination of whether to close restaurants in the future is subject to further evaluation and may change.
Executive Summary—Operating Performance for the Three Months Ended March 31, 2012
Total revenues for the first quarter of 2012 increased 7.3% to $211.6 million from $197.2 million in the first quarter of 2011. Revenues from Fiesta Restaurant Group increased 9.1% in the first quarter of 2012 to $126.1 million and revenues from our Burger King restaurants increased 4.7% to $85.5 million from $81.6 million in the first quarter of 2011. Comparable restaurant sales in the first quarter of 2012 increased 9.4% at our Pollo Tropical restaurants, increased 6.1% at our Taco Cabana restaurants and increased 5.9% at our Burger King restaurants. The comparable restaurant sales increases at Pollo Tropical and Burger King were primarily a result of higher customer traffic although each brand’s average check also increased in the first quarter of 2012. The comparable sales increase at our Taco Cabana restaurants was due both to an increase in average check and higher customer traffic.
Restaurant operating margins in the first quarter of 2012 were negatively impacted by higher food commodity costs at each of our three restaurant brands as cost of sales, as a percentage of total restaurant sales, increased to 31.7% from 30.6%. These increases were partially offset by favorable sales mix changes at our Burger King restaurants, as well as menu price increases taken in the last twelve months at all three of our brands. As a percentage of total restaurant sales, restaurant wages and related expenses decreased to 29.2% in the first quarter of 2012 from 29.7% in the first quarter of 2011 due to the effect of higher sales volumes at all three of our restaurant brands on fixed labor costs. Advertising expense, as a percentage of total restaurant sales, decreased to 3.3% in the first quarter of 2012 from 3.8% in the first quarter of 2011 primarily from advertising credits received by our Burger King restaurants associated with BKC’s 2012 menu enhancement initiatives and higher sales from promotional activities at Pollo Tropical. Operating results were also favorably impacted by lower utility costs which, as a percentage of total restaurant sales, decreased to 3.1% in the first quarter of 2012 from 3.4% in the first quarter of 2011.
General and administrative expenses increased to $17.4 million in the first quarter of 2012 from $13.9 million in the first quarter of 2011 due primarily to expenses of $1.4 million related to the conversion on March 5, 2012 of our outstanding stock options into either shares of our unrestricted common stock or restricted common stock in connection with the spin-off of Fiesta Restaurant Group, and the acceleration of vesting of restricted stock awards upon the departure of the former Chairman of Fiesta Restaurant Group’s board of directors and higher administrative bonus accruals of $0.6 million. General and administrative expenses in the first quarter of 2012 also included $1.5 million of legal and other costs incurred in connection with the spin-off of Fiesta Restaurant Group and the pending acquisition of Burger King restaurants from BKC.
Impairment and other lease charges in the first quarter of 2012 were $6.9 million compared to $1.1 million in the first quarter of 2011 and were due to the closure of our five Pollo Tropical restaurants in New Jersey and impairment charges for two Taco Cabana restaurants.
Fiesta Restaurant Group Operating Results
Since the beginning of the first quarter of 2011 through the end of the first quarter of 2012, we have opened four new Pollo Tropical restaurants and four new Taco Cabana restaurants. During the same period we closed seven Pollo Tropical restaurants and two Taco Cabana restaurants.
Total restaurant sales for Fiesta Restaurant Group increased 9.0% to $125.6 million in the first quarter of 2012 from $115.3 million in the first quarter of 2011. Pollo Tropical restaurant sales in the first quarter of 2012 increased 10.4% to $57.3 million due primarily to an increase in comparable restaurant sales of 9.4% due primarily to a 6.7% increase in customer traffic and a 2.4% increase in average check, compared to the first quarter of 2011. In addition, two restaurants opened since the beginning of the first quarter of 2011 contributed $1.3 million in additional sales in the first quarter. The effect of menu price increases taken at our Pollo Tropical restaurants in the last twelve months was approximately 3.8%.
Taco Cabana restaurant sales in the first quarter of 2012 increased 7.8% to $68.2 million due primarily to an increase in comparable restaurant sales of 6.1% in the first quarter of 2012 resulting from a 3.9% increase in average check from primarily menu price increases and a 2.3% increase in customer traffic. The effect of menu price increases taken in the last twelve months was approximately 3.6%. In addition, four restaurants opened since the beginning of the first quarter of 2011 and contributed $1.7 million in additional sales in the first quarter of 2012.
Pollo Tropical Operating Costs and Expenses (percentages stated as a percentage of Pollo Tropical restaurant sales). Pollo Tropical cost of sales increased to 33.4% in the first quarter of 2012 from 33.0% in the first quarter of 2011 due primarily to higher commodity prices (1.0%), including chicken (0.4%) and increased costs related to new menu offerings, partially offset by the effect of menu price increases. Pollo Tropical restaurant wages and related expenses decreased to 23.2% in the first quarter of 2012 from 23.7% in the first quarter of 2011 due primarily to the effect of higher sales volumes on fixed labor costs (0.7%) partially offset by higher medical insurance claims. Pollo Tropical other restaurant operating expenses were 12.2% in both the first quarter of 2012 and 2011 as the effect of lower utility costs (0.3%) was offset by higher repairs and maintenance expense. Pollo Tropical advertising expense decreased to 2.2% in the first quarter of 2012 from 2.5% in the first quarter of 2011 due to higher sales volumes from promotional activities. For all of 2012 we anticipate advertising expense to be range between 2.8% to 3.0% of Pollo Tropical restaurant sales. Pollo Tropical restaurant rent expense decreased to 3.7% in the first quarter of 2012 from 4.5% in the first quarter of 2011 due primarily to the effect of higher sales volumes on fixed rental costs.
Taco Cabana Operating Costs and Expenses (percentages stated as a percentage of Taco Cabana restaurant sales). Taco Cabana cost of sales increased to 31.7% in the first quarter of 2012 from 30.3% in the first quarter of 2011 due primarily to higher commodity prices (2.4%) including beef fajita meat (1.2%) partially offset by the effect of menu price increases taken in the last twelve months. Taco Cabana restaurant wages and related expenses decreased to 30.1% in the first quarter of 2012 from 30.5%% in the first quarter of 2011 due primarily to the effect of higher sales volumes on fixed labor costs. Taco Cabana other restaurant operating expenses decreased to 13.0% in the first quarter of 2012 from 13.3% in the first quarter of 2011 due primarily to lower utility costs (0.4%) partially offset by higher repair and maintenance expenses (0.2%). Taco Cabana advertising expense was 4.4% in both the first quarter of 2012 and the first quarter of 2011. For all of 2012 we anticipate advertising expense to range between 4.0% to 4.2% of Taco Cabana restaurant sales. Taco Cabana restaurant rent expense decreased to 6.0% in the first quarter of 2012 from 6.4% in the first quarter of 2011 due primarily to the effect of higher sales volumes on fixed rental costs.
Adjusted Segment EBITDA. Due to the factors above, Adjusted Segment EBITDA for our Pollo Tropical restaurants increased to $10.3 million in the first quarter of 2012 from $8.9 million in the first quarter of 2011. Adjusted Segment EBITDA for our Taco Cabana restaurants decreased to $4.9 million in the first quarter of 2012 from $5.0 million in the first quarter of 2011. General and administrative expenses for each segment includes general and administrative expenses related directly to the segment as well as allocated expenses associated with administrative support for executive management, information systems and certain accounting, legal and other administrative functions.
Impairment and Other Lease Charges . Impairment and other lease charges of $6.9 million in the first quarter of 2012 consisted of asset impairment charges of $4.1 million and lease charges of $1.8 million associated with the closure of our five Pollo Tropical restaurants in New Jersey in the first quarter of 2012 and $1.0 million of asset impairment charges for two Taco Cabana restaurants. Two of the five closed Pollo Tropical restaurants’ assets were previously impaired in 2011. Impairment and other lease charges were $0.3 million in the first quarter of 2011 which included $0.2 million in lease charges for a Pollo Tropical restaurant that was closed in the first quarter of 2011 and whose assets were previously impaired in 2010.
CONF CALL
Paul Flanders
Good afternoon, everyone. By now you’ve had access to the announcement that was released earlier which can also be found on the website at www.carrols.com under the Investor Relations Section. Before we begin our remarks I want to remind everyone that our discussion today will include forward-looking statements and comments regarding our strategies, intentions or plans. These statements are not guarantees of future performance and therefore undue reliance should not be placed on them.
We also refer you to our filings with the SEC for a more detailed discussion of the risks that could impact our business and financial results. I also want to point you to certain fillings with the SEC that have either been made today or that we intend to make over the next few days. Fiesta Restaurant Group will file a Form 8(k) today which will include the Q1 financial results on a standalone basis for Fiesta. This filing also includes certain pro forma information regarding lease accounting changes occurring upon the spinoff.
We plan to file Q1 10(q)s for both Carrols and Fiesta in the next couple of days. Carrols will also file a Form 8(k) later this week for the spinoff of Fiesta which was completed yesterday. This filing will include the pro forma Carrols financial statements recast to reflect Fiesta as a discontinued operation. Because the spinoff did not occur until the current quarter our actual Q1 financial statements for Carrols will still include the Fiesta results.
Lastly, we will discuss the Carrols’ pending acquisition of the 278 Burger King restaurants in a moment. We anticipate that we will file a Form 8(k) which will include certain financial information for the acquired restaurants and pro forma financial information that gives effect to the acquisition. We hope to file this sometime next week. I encourage you to refer to all these filings to better understand the standalone results of operations and financial conditions for each of Carrols and Fiesta, including implications with regard to their respective financial statements after giving effect to the spinoff and effect of the pending acquisition.
Finally, on the call with me today is Dan Accordino, CEO of Carrols Restaurant Group, and Tim Taft, CEO of Fiesta Restaurant Group. I’ll now turn the call over to Dan.
Dan Accordino
Thanks, Paul, and good afternoon everyone. Having just completed the spinoff of Fiesta yesterday I want to start by wishing our colleagues at Fiesta success as they begin life as a separate public company. I will use my time today to discuss Carrols’ future as Burger King’s largest franchisee. Tim will provide an update on the Fiesta business and Paul will cover the Q1 financial results.
Having spent most of my professional career at Carrols I can say that I’ve never been more excited about Carrols’ future, and it’s clear to me that my enthusiasm and optimism is shared throughout the organization. As a singularly-focused company we will now be directing our full attention and resources to our Burger King operations and playing our part in the transformation and revitalization of the Burger King brand, which I will speak about in greater detail momentarily.
We are excited to be moving forward with our objective of growing within the Burger King system, something that we first began discussing when we announced our intention to spin off Fiesta. We believe that our size and scale as Burger King’s largest franchisee affords us the ability to grow within the system and to create long-term value for our shareholders.
As you are likely aware, in late March we announced that we entered into a purchase agreement with Burger King Corporation to acquire 278 of their restaurants in markets generally contiguous to our own Burger King footprint. Well the absolute size of this transaction is by itself integral to our long-term growth strategy, equally important is the structure of the transaction. Burger King Corporation has reinforced its strategic relationship with Carrols by agreeing to take an approximate 29% equity stake in our company as a significant component of consideration for the acquisition. In addition, Burger King will be assigning a right of first refusal to us for franchisee-to-franchisee restaurant sales in a 20-state region. This is an important aspect of the transaction from our perspective since future acquisitions are an important component of our long-term growth strategy.
Near-term we are focused on three things: first, to close the acquisition which includes completing our financing to fund the transaction and to provide capital for the restaurant remodeling plan that we have agreed to; next, integrate these restaurants with our information and operational systems. We have already begun to focus on this and we believe there are significant opportunities to improve operational and financial performance for the acquired restaurants. While maybe a bit premature to discuss specifics I will note that restaurant (inaudible) of 278 units is about a third of that for our existing restaurants on volumes that are only about 8% to 10% lower.
Last but not least we have committee to remodel more than 450 restaurants over the next three and a half years to the new Burger King 2020 image. We believe that this is an important part of Burger King’s overall transformation strategy and we are focused on accelerating our remodeling activities to support this.
Next, I’ll focus on some of the transformational changes and enhancements being implemented throughout the Burger King system as it repositions itself within the quick service segment. Although it’s only been a few weeks since some of these changes were announced or took effect, I can say that preliminary consumer feedback has been very positive and that the momentum experienced in Q1 in both average check and customer traffic has accelerated in Q2.
First, the menu: Burger King has taken a number of steps to modify and upgrade its products and menu structure, culminating with the introduction of more than a dozen new menu items in early April. This is Burger King’s broadest menu expansion in its 58-year history and it’s designed to evolve the brand so that it’s more relevant to today’s QSR customer while expanding the brand’s appeal to a broader demographic. The new menu items range from garden fresh salads, snack wraps and crispy chicken strips to real fruit smoothies and frappes, all made to order. These offerings are in addition to the earlier launch of the fire-grilled BK Toppers line and our new Golden Crispy Fries, a dramatically improved French fry made with thicker cut potatoes.
Second, marketing: in conjunction with its new product expansion Burger King launched a series of new advertising campaigns focused first on its food but also featuring A-list celebrities such as David Beckham, Salma Hayek, Sofia [Bragarra] and Jay Leno to name a few. This series of ads is part of a national multi-platform marketing campaign that also extends across social media and digital applications. These rebranding and promotional efforts support the brand’s focus on the quality of our food, improving the marketing image of the brand and broadening its consumer appeal.
Third, brand image: an important element of the Burger King transformation strategy involved enhancing the image of its restaurants throughout the system and to create marketing consistency between the image and the overall quality of our products. In conjunction with the pending acquisition we are accelerating the remodeling of our restaurants and plan to remodel more than 50 restaurants in 2012, and to remodel more than 450 restaurants over the next three and a half years. Once completed, nearly 80% of our store base will feature the 2020 restaurant image which showcases a fresh, sleek and eye-catching design. With capital requirements which we estimate will average around $300,000 per remodel, total capital expenditures for this initiative are expected to be approximately $135 million to $150 million.
As you can see, there are a lot of changes underway, and although we are still in the early stages of this transformational process we believe that these initiatives provide positive momentum for the brand which will create sustainable traction in our performance. And now let me quickly review Q1.
As you can see in our release we experienced strong revenue growth in our Burger King restaurants. Comparable restaurant sales increased 5.9%, making it the third consecutive quarter of positive in-store sales and our best quarterly performance in a few years. Adjusted EBITDA for the Burger King segment in Q1 2012 was $3.4 million compared to $3.8 million in Q1 2011. Excluding staff and acquisition expenses, segment EBITDA improved to $4.3 million from $3.9 million and gained about 25 basis points as a percentage of revenues. With that, I’ll turn the call over to Tim Taft, Chief Executive Officer of Fiesta Restaurant Group.
Tim Taft
Thank you, Dan. I know I speak for everybody on the Fiesta Team when I say how appreciative we are for what Carrols has done to build Pollo Tropical and Taco Cabana into the brands they are today. We’re delighted to begin our corporate life as an independent company. In terms of putting together the finishing touches on our leadership team, we should be able to make two important personnel announcements over the coming weeks and months including the new Chief Financial Officer and the Chief Development Officer.
The role of Chief Development Officer is a new position we are creating within the organization that’s a critical step toward our long-term growth plans that will be responsible for heading up development at both brands. On a related note we recently named Danny Meisenheimer to the newly created position of Chief Brand Officer of Pollo Tropical. Danny will oversee marketing, communications and R&D. Having worked with him in the past I can personally attest to his caliber and formidable skillset, and consider him a fine addition to our team and someone I trust implicitly with the Pollo Tropical brand.
Turning to our performance and business strategy, we’re certainly pleased with Fiesta’s strong start to 2012 and think our performance in Q1 sets us up nicely for the full year. We believe that our results reflect our continued focus on three key initiatives which include first, leveraging our favorable brand attributes to drive comparable restaurant sales while capitalizing on the consumer trends towards freshly prepared food, convenience and value. As many of you know, Fiesta has enjoyed strong industry-leading comps since 2010. To build on this track record we’re focused on four distinct revenue streams: on- and off-premises consumption, whole meal replacement, continued product development, and brand elevation.
Second, increasing our geographic reach through strategic new unit development and building brand familiarity by clustering stores in new markets. We’re also improving the quality of our asset base through selective remodeling; and finally, improving margins through operating leverage, commodity contracting and supply chain initiatives. At both brands our portable product offerings have improved lunch sales during the quarter as more customers look for a fresher and healthier on-the-go meal solution.
The speed of service in our restaurants allows us to compete with quick service while delivering quality food comparable to casual dining. At Pollo our “Create Your Own Family Meal” offerings have contributed to increases in our dinner sales as our customers recognize the affordability and high quality of whole meal replacement options that we offer in our restaurants. We’re also addressing efforts to improve ordering at both brands and are in the process of incorporating conversational ordering techniques into our POS system to speed the ordering process, improve order accuracy and allow us to deliver on customer requests for customization. We’re also seeing positive feedback from our table service implementation which resonates well with the high-quality products our customers have come to expect.
Now I want to talk about development and remodeling. As you know, our development strategy with Pollo has evolved considerably over the past three years and we’ve refined our site selection and customer demographic material to be more general market and less Latin-centric. With the success of our Atlanta, two Jacksonville restaurants, and now our second restaurant in Atlanta that just opened last Friday, we’re demonstrating our ability to be successful outside of the South Florida market and are generating volumes for these new restaurants that are well above our system-wide AUBs. As we move forward, we look to identify and secure high-profile locations near big box retailers and other traffic generating entities, and households with higher incomes, for our future sites.
Pollo Tropical, as I have mentioned, is a little ahead of Taco Cabana in terms of brand evolution. However, now that we are essentially complete with our Pollo remodeling projects we’re shifting the focus of our remodeling efforts to Taco Cabana. We’re updating older units to reflect a clean, contemporary look and have received favorable response from our customers. This, coupled with the quality real estate locations our team has been identifying, makes us hopeful we will see these initiatives translate into higher AUBs for Taco Cabana.
In Q1 we made a decision to close our five Pollo restaurants in New Jersey. These legacy locations were not profitable and coupled with unfavorable supply chain logistics and a disproportionate amount of resources being devoted to them, we decided that we would be better served by concentrating on opportunities with greater promise. As a result, we took a $5.9 million impairment on lease charges in Q1 as we exited this market in late March.
Our last initiative is margin improvement. To achieve our goal here we are executing our five points of focus: great food, cleanliness, hospitality, consistency, accuracy and well-maintained facilities. These restaurant basics are at the core of our operating DNA and can greatly impact our guest experience and help gain increased frequency and loyalty from our customers. In addition, we are also realizing efficiencies through purchase and supply chain initiatives, managing our commodity exposure and adding value to our many offerings by improving the quality of core products which are also critical to margin improvement.
Before Paul reviews the financials, let me offer a brief review of Fiesta’s Q1 results. At Pollo Tropical comparable restaurant sales increased a solid 9.4%, marking the tenth consecutive quarter of comparable unit sales at the brand. Key products and promotions were focused on the popular [Tropic Chop] which is a customized bowl with a choice of protein, veggies, rice and beans along with wraps and salads.
At Taco Cabana we continued to experience positive momentum with a comparable restaurant sales increase of 6.1%. Key products and promotions during the quarter included the [Value] meals for under $5, hickory smoked brisket, and we reintroduced the shrimp Tampico during the Lenten season.
Fiesta adjusted EBITDA as reported for Q1 was $15.1 million compared to $15.9 million in Q1 2011. Excluding allocated expenses related to the spinoff, Fiesta adjusted EBITDA was $15.8 million in Q1 2012 compared to $14.1 million in the prior-year Q1. With that, I’m going to turn the call back over to Paul.
Paul Flanders
Thanks, Tim. For Q1 2012, total revenues increased 7.3% to $211.6 million. Burger King segment revenues increased 4.7% to $85.5 million, while revenues for Fiesta grew 9.1% to $126.1 million compared to Q1 2011. Overall cost of sales was 31.7% of restaurant sales and increased 107 basis points from Q1 2011, as all three brands contended with higher commodity costs partially offset by favorable sales mix changes and the effect of menu price increases.
Restaurant labor costs were 29.2% of restaurant sales and decreased 51 basis points from the prior year as we leveraged this line item on higher sales volumes. Restaurant operating expenses which exclude rent and advertising were 14% of total restaurant sales, and 22 basis points lower than last year. Advertising expense was $7 million for Q1 2012 and $512,000 lower than last year. This decrease mostly reflected the effect of advertising credits that we’re receiving from Burger King over the next four years to offset the new [coupon] investments made in late 2011 and early 2012 for new product introductions. This advertising credit is approximately $1.6 million per year.
General and administrative expenses were $17.4 million for the quarter compared to $13.9 million in Q1 2011. In Q1 2012 we incurred fees and expenses of $1.5 million or $0.05 per diluted share related to the spinoff of Fiesta and for the Burger King acquisition. Also included were $1.4 million of expenses, or $0.05 per diluted share of expenses – primarily stock-based compensation – related to the conversion of employee stock options to restrict stock in connection with the spinoff, and for the accelerated investing of the restrictive stock held by Fiesta’s former Chairman of the Board.
Impairment and other lease charges totaled $6.9 million including $5.9 million for the five New Jersey Pollo Tropical restaurants that were closed in March, and $1 million for the impairment of two Taco Cabana restaurants. As a result of the $9.8 million in charges during Q1, income from operations fell to $1.3 million from $7.9 million in the year-ago period. Interest expense was $6.3 million for the quarter compared to $4.6 million in the prior year due to increases in both total debt and our weighted average interest rate due to refinancing in August, 2011 in anticipation of the spinoff.
We had net loss for Q1 of $3.5 million or $0.16 per diluted share compared to net income of $2.2 million or $0.10 per share in Q1 2011. On an after-tax basis, the charges which I discussed amounted to $0.32 per diluted share. In Q1 2011 we had $1.1 million impairment and other lease charges of $0.03 per share and expenses related to the spinoff of $300,000, or $0.01 per share after tax. Total outstanding debt was $274 million at the end of the quarter including Fiesta’s $200 million senior notes and borrowings under the Carrols LLC term loan facility of $61.8 million.
I’ll now give you some brief color of both Carrols’ and Fiesta’s financials for the quarter. Our Burger King business revenue increased 4.7% to $85.5 million with strong comparable (inaudible) drive sales increasing at 5.9%, which included a 4.3% increase in traffic along with a 1.7% increase in average check. Effective pricing for the quarter was 3%.
Cost of sales as a percentage of sales increased approximately 120 basis points for the quarter due to higher beef costs, other commodity increases and due to higher promotional activity. Beef costs at $2.05 per pound were up about 11.4% from Q1 2011. However, overall restaurant level margins for the quarter improved approximately 70 basis points compared to the prior year due to our leveraging restaurant labor costs and other restaurant operating expenses, as well as the advertising credits I mentioned earlier. Burger King’s capital expenditures for the quarter totaled $7 million including $2 million for remodeling initiatives and $3.9 million for the rollout of new point of sale systems.
Turning to Fiesta, Pollo Tropical revenues increased 10.7% to $57.8 million with comparable restaurant sales up a solid 9.4% against a positive 13.5% comparison from the prior year. Customer traffic increased 6.7%; effective pricing was 3.8%; and average check increased 2.4%. For Taco Cabana, revenues increased 7.8% to $68.3 million with comparable restaurant sales of 6.1% against a positive 2% comparison from the prior year. Customer traffic increased 2.4% while effective pricing was 3.6%, and average check was up 3.9%.
Cost of sales for Fiesta in the quarter increased approximately 95 basis points due to the higher commodity costs, particularly chicken and beef. However, overall restaurant level margins for the quarter improved approximately 43 basis points compared to the prior year, again due to leveraging of labor costs, advertising and other operating expenses. Fiesta’s capital expenditures for the quarter total $8.5 million including $5.4 million for new units and $1.3 million for remodeling. Fiesta also purchased one of its operating restaurants for $2.1 million which will be marketed as a future sale leaseback.
During the quarter we closed five Pollo Tropical restaurants and one Taco Cabana restaurant, bringing our current restaurant total to 86 Pollo Tropical restaurants and 15 Taco Cabana restaurants. I’d now like to provide you with a full-year outlook on both brands.
For Carrols’ Burger King brand we expect the following: comparable restaurant sales are expected to increase 3% to 5%, commodity costs are expected to increase 3% to 4%. Two restaurants are expected to close in 2012; we’ve closed one of those in Q1. The annualized run rate for general and administrative expenses excluding stock compensation is expected to be approximately $20 million to $22 million following the spinoff of Fiesta.
With regards to income taxes we currently expect to record a tax benefit for all of 2012 ranging from $700,000 to $1.3 million due in part to the deductibility of stock compensation costs related to the conversion of stock options in Q1. Capital expenditures are expected to be approximately $30 million to $35 million including $19 million to $24 million for remodeling more than 50 restaurants. This guidance excludes any effect from the acquisition of the Burger King restaurants except the capital expenditures which have been adjusted to reflect the company’s accelerated remodeling plans in anticipation of the acquisition. We will update our guidance at some time in the future for the acquisition.
With regards to Fiesta’s outlook we expect the following: comparable restaurant sales are expected to increase approximately 6% to 7% for Pollo Tropical and 4% to 5% for Taco Cabana. Commodity costs are expected to increase 1% to 2% for Pollo and 2.5% to 3.5% for Taco Cabana. Approximately 10 to 12 new restaurants are expected to be open and six restaurants are expected to be closed for the entire year; as I said earlier, we’ve closed all six of these in Q1.
The annualized run rate for general and administrative expenses is expected to be approximately $38 million to $40 million following the spinoff from Carrols. We expect the effective tax rate to be 41% to 43% and capital expenditures are estimated to be approximately $42 million to $46 million. And with that we’d now be happy to open the line for questions.
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