UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q



x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~September 28, 2014~~March 29, 2015



¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 001-33174

CARROLS RESTAURANT GROUP, INC.

(Exact name of Registrant as specified in its charter)




Delaware	16-1287774
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

968 James Street Syracuse, New York	13203
(Address of principal executive office)	(Zip Code)

Registrant’s telephone number, including area code: (315) 424-0513

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filer	o	Accelerated filer	x

Non-accelerated filer	o	Smaller reporting company	o
(Do not check if smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý

As of ~~November 3, 2014~~May 4, 2015, Carrols Restaurant Group, Inc. had ~~35,222,543~~35,499,066 shares of its common stock, $.01 par value, outstanding.

Table of Contents

CARROLS RESTAURANT GROUP, INC.

FORM 10-Q

QUARTER ENDED ~~SEPTEMBER 28, 2014~~March 29, 2015



		Page
PART I FINANCIAL INFORMATION

Item 1	Interim Consolidated Financial Statements (Unaudited) - Carrols Restaurant Group, Inc.:

	Consolidated Balance Sheets as of ~~September~~March 29, 2015 and December 28, 2014 ~~and December 29, 2013~~	3

	Consolidated Statements of Operations and Comprehensive Loss for the Three ~~and Nine~~ Months Ended ~~September 28,~~March 29, 2015 and March 30, 2014 ~~and September 29, 2013~~	4

	~~Consolidated Statements of Changes in Stockholders' Equity~~	5

	Consolidated Statements of Cash Flows for the ~~Nine~~Three Months Ended ~~September 28,~~March 29, 2015 and March 30, 2014 ~~and September 29, 2013~~	65

	Notes to Unaudited Interim Consolidated Financial Statements	76

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16

Item 3	Quantitative and Qualitative Disclosures About Market Risk	2829

Item 4	Controls and Procedures	29

PART II OTHER INFORMATION

Item 1	Legal Proceedings	29

Item 1A	Risk Factors	29

Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	29

Item 3	Defaults Upon Senior Securities	29

Item 4	Mine Safety Disclosures	29

Item 5	Other Information	2930

Item 6	Exhibits	2930

Table of Contents

PART I—FINANCIAL INFORMATION

ITEM 1—INTERIM CONSOLIDATED FINANCIAL STATEMENTS

CARROLS RESTAURANT GROUP, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands of dollars, except share and per share amounts)

(Unaudited)


	September 28, 2014			December 29, 2013			March 29, 2015			December 28, 2014
ASSETS
Current assets:
Cash	$	43,309		$	8,302		$	24,287		$	21,221
Trade and other receivables	5,051			2,846			5,977			4,034
Inventories	6,237			6,494			6,760			7,785
Prepaid rent	2,535			2,332			1,570			3,164
Prepaid expenses and other current assets	4,510			2,874			5,312			3,009
Refundable income taxes	2,416			2,631			—			2,416
Deferred income taxes	3,242			3,196			1,642			1,642
Total current assets	67,300			28,675			45,548			43,271
Restricted cash (Note 6)	20,000			20,000
Property and equipment, net of accumulated depreciation of $201,862 and $188,492, respectively	158,725			152,175
Franchise rights, net of accumulated amortization of $82,005 and $78,818, respectively (Note 5)	95,992			90,168
Goodwill (Note 5)	8,217			8,162
Franchise agreements, at cost less accumulated amortization of $6,787 and $6,353, respectively	12,718			12,802
Favorable leases, net of accumulated amortization of $732 and $496, respectively (Note 5)	3,231			2,974
Property and equipment, net of accumulated depreciation of $211,304 and $206,448, respectively							179,325			179,383
Franchise rights, net of accumulated amortization of $84,297 and $83,184, respectively (Note 3)							101,787			102,900
Goodwill (Note 3)							17,793			17,793
Franchise agreements, at cost less accumulated amortization of $7,796 and $7,502, respectively							14,108			14,602
Favorable leases, net of accumulated amortization of $956 and $841, respectively (Note 3)							4,610			4,725
Deferred financing costs	3,597			4,344			3,290			3,399
Deferred income taxes	14,498			6,824
Other assets	3,094			3,357			1,601			3,324
Total assets	$	387,372		$	329,481		$	368,062		$	369,397
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt (Note 6)	$	1,067		$	1,147
Current portion of long-term debt (Notes 6 and 12)							$	1,293		$	1,272
Accounts payable	14,611			14,687			16,018			19,239
Accrued interest	6,368			2,140			6,467			2,170
Accrued payroll, related taxes and benefits	16,075			18,021			19,762			17,321
Accrued real estate taxes	3,866			4,945			4,241			4,908
Other liabilities	12,145			9,709			15,220			10,273
Total current liabilities	54,132			50,649			63,001			55,183
Long-term debt, net of current portion (Note 6)	156,462			158,189
Long-term debt, net of current portion (Notes 6 and 12)							157,091			157,422
Lease financing obligations	1,201			1,200			1,202			1,202
Deferred income—sale-leaseback of real estate	15,557			16,824			14,660			15,108
Deferred income taxes							1,642			1,642
Accrued postretirement benefits	2,157			2,370			3,135			3,121
Unfavorable leases, net of accumulated amortization of $1,922 and $1,378, respectively (Note 5)	7,785			8,175
Other liabilities (Note 8)	15,746			14,870
Unfavorable leases, net of accumulated amortization of $2,572 and $2,240, respectively (Note 3)							12,695			13,027
Other liabilities (Note 5)							17,037			16,157
Total liabilities	253,040			252,277			270,463			262,862
Commitments and contingencies (Note 9)
Stockholders’ equity (Note 13):
Stockholders’ equity:
Preferred stock, par value $.01; authorized 20,000,000 shares, issued and outstanding—100 shares	—			—			—			—
Voting common stock, par value $.01; authorized—100,000,000 shares, issued—35,222,765 and 23,711,257 shares, respectively, and outstanding—34,824,060 and 23,048,334 shares, respectively	348			230
Voting common stock, par value $.01; authorized—100,000,000 shares, issued—35,499,066 and 35,222,667 shares, respectively, and outstanding—34,895,803 and 34,827,240 shares, respectively							349			348
Additional paid-in capital	137,350			69,258			137,986			137,647
Retained earnings (accumulated deficit)	(3,927		)	7,155
Accumulated deficit							(40,238		)	(30,962		)
Accumulated other comprehensive income	702			702			(357		)	(357		)
Treasury stock, at cost	(141		)	(141		)	(141		)	(141		)
Total stockholders’ equity	134,332			77,204			97,599			106,535
Total liabilities and stockholders’ equity	$	387,372		$	329,481		$	368,062		$	369,397

The accompanying notes are an integral part of these unaudited consolidated financial statements.

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CARROLS RESTAURANT GROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

THREE ~~AND NINE~~ MONTHS ENDED ~~SEPTEMBER 28,~~MARCH 29, 2015 AND MARCH 30, 2014 ~~AND SEPTEMBER 29, 2013~~

(In thousands of dollars, except share and per share amounts)

(Unaudited)


	Three Months Ended						Nine Months Ended						Three Months Ended
	September 28, 2014			September 29, 2013			September 28, 2014			September 29, 2013			March 29, 2015			March 30, 2014
Restaurant sales	$	179,822		$	168,312		$	499,858		$	497,969		$	193,170		$	151,453
Costs and expenses:
Cost of sales	55,169			51,125			148,606			152,626			56,850			43,349
Restaurant wages and related expenses	56,023			52,395			159,764			156,727			63,312			50,937
Restaurant rent expense	12,205			11,779			35,269			35,357			14,424			11,438
Other restaurant operating expenses	29,179			26,973			82,264			80,756			32,492			26,025
Advertising expense	6,794			7,476			20,621			22,496			7,283			6,543
General and administrative (including stock-based compensation expense of $296, $302, $883 and $899, respectively)	10,031			8,740			28,923			27,342
General and administrative (including stock-based compensation expense of $341 and $296, respectively)													11,596			10,267
Depreciation and amortization	9,318			8,536			27,121			24,990			10,005			8,758
Impairment and other lease charges (Note 4)	773			1,079			1,822			3,907			1,630			620
Other expense (income) (Note 11)	—			—			25			(185		)
Other expense													40			—
Total operating expenses	179,492			168,103			504,415			504,016			197,632			157,937
Income (loss) from operations	330			209			(4,557		)	(6,047		)
Loss from operations													(4,462		)	(6,484		)
Interest expense	4,683			4,708			14,080			14,130			4,814			4,703
Loss before income taxes	(4,353		)	(4,499		)	(18,637		)	(20,177		)	(9,276		)	(11,187		)
Benefit for income taxes (Note 7)	(2,632		)	(1,737		)	(7,555		)	(8,720		)	—			(3,758		)
Net loss	$	(1,721	)	$	(2,762	)	$	(11,082	)	$	(11,457	)	$	(9,276	)	$	(7,429	)
Basic and diluted net loss per share (Note 12):	$	(0.05	)	$	(0.12	)	$	(0.37	)	$	(0.50	)
Basic and diluted net loss per share (Note 11):													$	(0.27	)	$	(0.32	)
Shares used in computing net loss per share:
Basic and diluted weighted average common shares outstanding	34,797,490			23,020,529			29,571,846			22,929,505			34,882,302			23,151,523
Comprehensive loss, net of tax:
Other comprehensive loss, net of tax:
Net loss	$	(1,721	)	$	(2,762	)	$	(11,082	)	$	(11,457	)	$	(9,276	)	$	(7,429	)
Other comprehensive loss	—			—			—			(13		)	—			—
Comprehensive loss	$	(1,721	)	$	(2,762	)	$	(11,082	)	$	(11,470	)	$	(9,276	)	$	(7,429	)

The accompanying notes are an integral part of these unaudited consolidated financial statements.

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CARROLS RESTAURANT GROUP, INC.

CONSOLIDATED STATEMENTS OF ~~CHANGES IN STOCKHOLDERS' EQUITY~~CASH FLOWS

THREE MONTHS ENDED MARCH 29, 2015 AND MARCH 30, 2014

(In thousands of ~~dollars, except share and per share amounts)~~dollars)

(Unaudited)

Retained Accumulated
Additional Earnings Other Total
Common Stock Preferred Paid-In (Accumulated Comprehensive Treasury Stockholders'
Shares Amount Stock Capital Deficit) Income Stock Equity
Balance at December 30, 2012 22,748,241
$ 227
$ —
$ 68,056
$ 21,362
$ 669
$ (141 ) $ 90,173
Stock-based compensation —
—
—
1,205
—
—
—
1,205
Vesting of non-vested shares and excess tax benefits 300,093
3
—
(3 ) —
—
—
—
Distribution of Fiesta Restaurant Group's net assets —
—
—
—
(688 ) —
—
(688 )
Net loss —
—
—
—
(13,519 ) —
—
(13,519 )
Change in postretirement benefit obligations, net of tax of $30 —
—
—
—
—
33
—
33
Balance at December 29, 2013 23,048,334
230
—
69,258
7,155
702
(141 ) 77,204
Stock-based compensation —
—
—
883
—
—
—
883
Vesting of non-vested shares and excess tax benefits 275,726
3
—
(3 ) —
—
—
—
Public stock offering (Note 13) 11,500,000
115
—
67,212
—
—
—
67,327
Net loss —
—
—
—
(11,082 ) —
—
(11,082 )
Balance at September 28, 2014 34,824,060
$ 348
$ —
$ 137,350
$ (3,927 ) $ 702
$ (141 ) $ 134,332



	Three Months Ended
	March 29, 2015			March 30, 2014
Cash flows provided from operating activities:
Net loss	$	(9,276	)	$	(7,429	)
Adjustments to reconcile net loss to net cash provided from operating activities:
Loss on disposals of property and equipment	171			119
Stock-based compensation	341			296
Impairment and other lease charges	1,630			620
Depreciation and amortization	10,005			8,758
Amortization of deferred financing costs	257			251
Amortization of deferred gains from sale-leaseback transactions	(448		)	(450		)
Deferred income taxes	—			(3,790		)
Change in refundable income taxes	2,416			32
Changes in other operating assets and liabilities	9,384			1,944
Net cash provided from operating activities	14,480			351
Cash flows used for investing activities:
Capital expenditures:
New restaurant development	(18		)	(1,408		)
Restaurant remodeling	(8,792		)	(4,020		)
Other restaurant capital expenditures	(2,552		)	(1,283		)
Corporate and restaurant information systems	(704		)	(254		)
Total capital expenditures	(12,066		)	(6,965		)
Properties purchased for sale-leaseback	(697		)	(3,412		)
Proceeds from sale-leaseback transactions	1,808			1,621
Net cash used for investing activities	(10,955		)	(8,756		)
Cash flows provided from (used for) financing activities
Borrowings under senior credit facility	—			20,500
Repayments under senior credit facility	—			(18,750		)
Principal payments on capital leases	(311		)	(245		)
Financing costs associated with issuance of debt	(148		)	—
Net cash provided from (used for) financing activities	(459		)	1,505
Net increase (decrease) in cash	3,066			(6,900		)
Cash, beginning of period	21,221			8,302
Cash, end of period	$	24,287		$	1,402
Supplemental disclosures:
Interest paid on long-term debt	$	234		$	189
Interest paid on lease financing obligations	$	26		$	23
Accruals for capital expenditures	$	2,689		$	1,046
Income taxes refunded	$	2,416		$	—
Non-cash reduction of capital lease assets and obligation	$	—		$	1,055

The accompanying notes are an integral part of these unaudited consolidated financial statements.

~~Table of Contents~~

~~CARROLS RESTAURANT GROUP, INC.~~

~~CONSOLIDATED STATEMENTS OF CASH FLOWS~~

~~NINE MONTHS ENDED SEPTEMBER 28, 2014 AND SEPTEMBER 29, 2013~~

~~(In thousands of dollars)~~

~~(Unaudited)~~

Nine Months Ended
September 28, 2014 September 29, 2013
Cash flows provided from operating activities:
Net loss $ (11,082 ) $ (11,457 )
Adjustments to reconcile net loss to net cash provided from operating activities:
Loss on disposals of property and equipment 321
272
Stock-based compensation 883
899
Impairment and other lease charges 1,822
3,907
Depreciation and amortization 27,121
24,990
Amortization of deferred financing costs 754
752
Amortization of unearned income (130 ) (100 )
Amortization of deferred gains from sale-leaseback transactions (1,345 ) (1,349 )
Deferred income taxes (7,774 ) (4,438 )
Change in refundable income taxes 177
(4,269 )
Changes in other operating assets and liabilities 183
6,975
Net cash provided from operating activities 10,930
16,182
Cash flows used for investing activities:
Capital expenditures:
New restaurant development (1,661 ) (582 )
Restaurant remodeling (23,345 ) (31,574 )
Other restaurant capital expenditures (4,533 ) (5,724 )
Corporate and restaurant information systems (3,173 ) (2,478 )
Total capital expenditures (32,712 ) (40,358 )
Acquisition of restaurants, net of cash acquired (13,021 ) —
Proceeds from sale of other assets 54
—
Properties purchased for sale-leaseback (3,412 ) —
Proceeds from sale-leaseback transactions 6,604
—
Net cash used for investing activities (42,487 ) (40,358 )
Cash flows provided from (used for) financing activities
Borrowings under senior credit facility 32,750
—
Repayments under senior credit facility (32,750 ) —
Proceeds from public stock offering, net of expenses 67,327
—
Principal payments on capital leases (756 ) (789 )
Financing costs associated with issuance of debt (7 ) (8 )
Net cash provided from (used for) financing activities 66,564
(797 )
Net increase (decrease) in cash 35,007
(24,973 )
Cash, beginning of period 8,302
38,290
Cash, end of period $ 43,309
$ 13,317
Supplemental disclosures:
Interest paid on long-term debt $ 9,019
$ 8,567
Interest paid on lease financing obligations $ 77
$ 78
Accruals for capital expenditures $ 2,514
$ 1,425
Income taxes paid, net $ 41
$ —
Non-cash assets acquired $ —
$ 858
Non-cash reduction of capital lease assets and obligation $ 1,055
$ —

~~The accompanying notes are an integral part of these unaudited consolidated financial statements.~~

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CARROLS RESTAURANT GROUP, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands of dollars except share and per share amounts)

1. Basis of Presentation

Business Description. At ~~September 28, 2014~~March 29, 2015 Carrols Restaurant Group, Inc. ("Carrols Restaurant Group" or the "Company") operated, as franchisee, ~~581~~659 restaurants under the trade name “Burger King ®” in 1315 Northeastern, Midwestern and Southeastern states.

Basis of Consolidation. Carrols Restaurant Group is a holding company and conducts all of its operations through Carrols Corporation (“Carrols”) and its wholly-owned ~~subsidiaries~~subsidiary. The unaudited consolidated financial statements presented herein include the accounts of Carrols Restaurant Group and its wholly-owned subsidiary Carrols. Any reference to “Carrols LLC” refers to Carrols’ wholly-owned subsidiary, Carrols LLC, a Delaware limited liability company.

Unless the context otherwise requires, Carrols Restaurant Group, Carrols and the direct and indirect subsidiaries of Carrols are collectively referred to as the “Company.” All intercompany transactions have been eliminated in consolidation.

Fiscal Year. The Company uses a 52-5352-53 week fiscal year ending on the Sunday closest to December 31. The fiscal year ended December ~~29, 2013~~28, 2014 contained 52 weeks. The three ~~and nine~~ months ended~~September 28,~~ March 29, 2015 and March 30, 2014 ~~and~~ ~~September 29, 2013~~ each contained thirteen ~~and thirty-nine weeks, respectively.~~weeks.

Basis of Presentation. The accompanying unaudited consolidated financial statements for the three ~~and nine~~ months ended~~September 28,~~ March 29, 2015 and March 30, 2014 ~~and~~ ~~September 29, 2013~~ have been prepared without an audit, pursuant to the rules and regulations of the Securities and Exchange Commission and do not include certain of the information and the footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all normal and recurring adjustments considered necessary for a fair presentation of such unaudited consolidated financial statements have been included. The results of operations for three ~~and nine~~ months ended~~September 28,~~ March 29, 2015 and March 30, 2014 ~~and~~ ~~September 29, 2013~~ are not necessarily indicative of the results to be expected for the full year.

These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December ~~29, 2013~~.28, 2014. The December ~~29, 2013~~28, 2014 consolidated balance sheet data is derived from those audited financial statements.

Use of Estimates. The preparation of the accompanying unaudited consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the unaudited consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Significant items subject to such estimates include: accrued occupancy costs, insurance liabilities, ~~the~~ evaluation for impairment of goodwill, long-lived assets and franchise rights ~~for impairment,~~and lease accounting ~~matters and the valuation of deferred income tax assets.~~matters. Actual results could differ from those estimates.

Segment Information. Operating segments are components of an entity for which separate financial information is available and is regularly reviewed by the chief operating decision maker in order to allocate resources and assess performance. The Company's chief operating decision maker currently evaluates the Company's operations from a number of different operational ~~perspectives;~~perspectives, however ~~significant~~ resource allocation decisions ~~including the level of capital expenditures,~~ are made at ~~an overall Company level.~~a total-company basis. The Company derives all significant revenues from a single operating segment. Accordingly, the Company views the operating results ~~for all~~ of its Burger King restaurants as one reportable segment.

Fair Value of Financial Instruments. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. In determining fair value, the accounting standards establish a three level hierarchy for inputs used in measuring fair value as follows: Level 1 inputs are quoted prices in active markets for identical assets or liabilities; Level 2 inputs are observable for the asset or liability, either directly or indirectly, including quoted prices in active markets for similar assets or liabilities; and Level 3 inputs are unobservable and reflect the Company's own assumptions. Financial instruments include cash,

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CARROLS RESTAURANT GROUP, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(in thousands of dollars except share and per share amounts)

accounts receivable, accounts payable and long-term debt. The carrying amounts of cash, accounts receivable and accounts payable approximate fair value because of the short-term nature of these financial instruments. The fair value of the Carrols Restaurant Group 11.25% Senior Secured Second Lien Notes due 2018 is based on a recent trading value, which is considered Level 2, and at ~~September 28, 2014~~March 29, 2015 was approximately ~~$163.5 million~~.$159.4 million.

Fair value measurements of non-financial assets and non-financial liabilities are primarily used in the impairment analysis of long-lived assets ~~goodwill~~ and intangible assets. Long-lived assets and definite-lived intangible assets are measured at fair value on a nonrecurring basis using Level 3 inputs. As described in Note 4, the Company recorded long-lived asset impairment charges of $0.5 million and $0.2 million during the three months ended March 29, 2015 and March 30, 2014, respectively. Goodwill is reviewed annually for impairment on the last day of the fiscal year, or more frequently, if impairment indicators arise.

2. Acquisitions

During the year ended December 28, 2014, the Company acquired an aggregate of 123 restaurants from other franchisees, which we refer to as the "2014 acquired restaurants", in the following transactions:



Closing Date	Number of Restaurants	Purchase Price			Market Location
April 30, 2014	4	$	681		Fort Wayne, Indiana
June 30, 2014	4	3,819		(1)	Pittsburgh, Pennsylvania
July 22, 2014	21	8,609			Rochester, New York and Southern Tier of Western New York
October 8, 2014	30	20,330		(1)	Wilmington and Greenville, North Carolina
November 4, 2014	64	18,761		(2)	Nashville, Tennessee; Indiana and Illinois
	123	$	52,200


(1)	The acquisitions on June 30, 2014 and October 8, 2014 included the purchase of one and twelve fee-owned properties, respectively. Ten of these fee-owned properties were sold in sale-leaseback transactions during the fourth quarter of 2014 for net proceeds of $12,961 and one property was sold in a sale-leaseback transaction at the beginning of the first quarter of 2015 for net proceeds of $1,123.


(2)	In connection with the acquisition on November 4, 2014, the Company entered into an agreement with BKC to remodel 46 of the restaurants acquired over a five-year period beginning in 2014.

The 2014 acquired restaurants contributed restaurant sales of $32.5 million in the first quarter of 2015. It is impracticable to disclose net earnings for the post-acquisition period for the 2014 acquired restaurants as net earnings of these restaurants were not tracked on a collective basis due to the integration of administrative functions, including field supervision.

The pro forma impact on the results of operations for the 2014 acquisitions for the three months ended March 30, 2014 is included below. The pro forma results of operations are not necessarily indicative of the results that would have occurred had the acquisitions been consummated at the beginning of the periods presented, nor are they necessarily indicative of any future consolidated operating results. The following table summarizes the Company's unaudited pro forma operating results:



	Three Months Ended
	March 30, 2014
Restaurant sales	$	182,545
Net loss	$	(6,462	)
Basic and diluted net loss per share	$	(0.28	)

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CARROLS RESTAURANT GROUP, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(in thousands of dollars except share and per share amounts)

~~charges of~~ ~~$0.4 million~~This pro forma financial information does not give effect to any anticipated synergies, operating efficiencies or cost savings or any transaction and ~~$1.0 million during the~~ ~~three and nine months endedSeptember 28, 2014, respectively, and $1.1 million and $2.3 million during the~~ ~~three and nine months ended~~ ~~September 29, 2013, respectively. Nominal value was given~~integration costs related to the ~~Level 3 assets measured at~~2014 acquired restaurants.

3. Intangible Assets

Goodwill. The Company is required to review goodwill for impairment annually, or more frequently, when events and circumstances indicate that the carrying amount may be impaired. If the determined fair value ~~associated with~~of goodwill is less than the related carrying amount, an impairment ~~charges during the~~ ~~three and nine months endedSeptember 28, 2014. Goodwill~~loss is ~~reviewed annually for~~recognized. The Company performs its annual impairment onassessment as of the last day of ~~the~~its fiscal year and does not believe circumstances have changed since the last assessment date which would make it necessary to reassess its value. There were no goodwill impairment losses during the three months ended March 29, 2015 or ~~more frequently, if impairment indicators arise.~~March 30, 2014.

~~Subsequent Events.~~ On October 8, 2014, the Company exercised its right of first refusal and purchased 30 Burger King® restaurants in the Wilmington, North Carolina and Greenville, North Carolina markets for a cash purchase price of approximately $20.5 million, which included 12 fee-owned properties. On November 4, 2014, the Company purchased 64 Burger King® restaurants in or around the Nashville, TN, Springfield, IL, Terre Haute, IN, and Evansville, IN markets for a cash purchase price of ~~$18.0 million~~Franchise Rights. ~~excluding inventory.~~

~~2. Acquisitions~~

~~On April 30, 2014, the Company exercised its right~~Amounts allocated to franchise rights for each acquisition of ~~first refusal, assigned by~~ Burger King ~~Corporation ("BKC") as part~~restaurants are amortized using the straight-line method over the average remaining term of the ~~Company’s 2012 acquisition of 278 Burger King® restaurants from BKC, and~~ acquired four Burger King® restaurants in the Fort Wayne, Indiana market for a cash purchase price of $0.7 million. On June 30, 2014, the Company exercised its right of first refusal and purchased four Burger King® restaurants in the Pittsburgh, Pennsylvania market for a cash purchase price of $3.8 million. On July 22, 2014, the Company completed the acquisition of 21 Burger King® restaurants located in or around Rochester, NY and in the Southern Tier region of western New York State for a cash purchase price of $8.5 million.franchise agreements plus one twenty-year renewal period.

The Company ~~accounts for~~assesses the ~~acquisition~~potential impairment of ~~Burger King® restaurants using~~franchise rights whenever events or changes in circumstances indicate that the ~~acquisition method~~carrying value may not be recoverable. If an indicator of ~~accounting for business combinations. The Company engaged a third party valuation specialist to assist with the valuation of certain acquired assets. For purposes of a preliminary allocation~~impairment exists, an estimate of the ~~assets~~aggregate undiscounted cash flows from the acquired ~~and liabilities assumed,~~restaurants is compared to the respective carrying value of franchise rights for each acquisition. If an asset is determined to be impaired, the loss is measured by the excess of the ~~purchase price over the estimated fair value of net tangible and intangible assets has been assigned to franchise rights. The purchase price allocations will be finalized within twelve months~~carrying amount of the ~~closing of the aforementioned acquisitions. When the valuations are finalized, changes~~asset over its fair value. No impairment charges were recorded related to the ~~preliminary valuation of assets acquired may result in material adjustments to the fair value of identifiable intangible assets acquired, including~~Company’s franchise rights ~~and any related goodwill initially recorded.~~

~~Preliminary purchase price allocations to the net tangible and intangible assets were based upon their fair values on the acquisition date. Refer to Note 5~~ for the initial estimate of the fair value of the franchise rights associated with these acquired restaurants. The Company estimated that the carrying value of restaurant equipment, subject to certain adjustments, was equivalent to fair value of this equipment at the date of the acquisition. The fair value of franchise fees for certain restaurants was based on current market rates for such fees. The fair value of the favorable and unfavorable leases acquired, as well as the fair value of the leasehold improvements acquired, were measured using significant inputs observable in the open market. As such, the Company categorizes these as Level 2 inputs under ASC 820.

~~3. Stock-Based Compensation~~

~~Stock-based compensation expense in each of~~ the three months ended ~~September 28,~~March 29, 2015 or March 30, 2014.

Amortization expense related to franchise rights was $1.1 million and $1.0 million for the three months ended March 29, 2015 and March 30, 2014, ~~and September 29, 2013 was~~ ~~$0.3~~ respectively. The Company expects annual amortization expense to be $4.7 million in 2015 and in each of the ~~nine~~following five years.

Favorable and Unfavorable Leases. Amounts allocated to favorable and unfavorable leases are being amortized using the straight-line method over the remaining terms of the underlying lease agreements as a net reduction of restaurant rent expense.

The net reduction of rent expense related to the amortization of favorable and unfavorable leases was $0.2 million and $0.1 million for the three months ended ~~September 28,~~March 29, 2015 and March 30, 2014, ~~and September 29, 2013 was $0.9 million. As of~~ ~~September 28, 2014, the total unrecognized stock-based compensation expense relating to non-vested shares was approximately~~ ~~$1.9 million, which the Company expects to recognize over a remaining weighted average vesting period for non-vested shares of~~ ~~1.9~~ ~~years.~~ respectively. The Company expects the net annual reduction of rent expense to ~~record an additional~~ ~~$0.3~~be $0.8 million ~~as compensation expense for the remainder of~~ ~~2014~~. in 2015, $0.7 million in 2016, 2017 and 2018, $0.6 million in 2019, and $0.6 million in 2020.

~~A summary of all non-vested shares activity for the~~ ~~nine months endedSeptember 28, 2014~~ ~~was as follows:~~

Shares Weighted Average Grant Date Price
Non-vested at December 29, 2013 662,923
$ 7.35
Granted 14,048
7.12
Vested (275,726 ) 8.29
Forfeited (2,540 ) 10.13
Nonvested at September 28, 2014 398,705
$ 6.67

~~The fair value of the non-vested shares is based on the closing price on the date of grant, a Level 1 input.~~

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~~CARROLS RESTAURANT GROUP, INC.~~

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)~~

~~(in thousands of dollars except share and per share amounts)~~

4. Impairment of Long-Lived Assets and Other Lease Charges

The Company reviews its long-lived assets, principally property and equipment, for impairment at the restaurant level. If an indicator of impairment exists for any of its assets, an estimate of the undiscounted future cash flows over the life of the primary asset for each restaurant is compared to that long-lived asset’s carrying value. If the carrying value is greater than the undiscounted cash flow, the Company then determines the fair value of the asset and if an asset is determined to be impaired, the loss is measured by the excess of the carrying amount of the asset over its fair value. For closed restaurant locations, the Company reviews the future minimum lease payments and related ancillary costs from the date of the restaurant closure to the end of the remaining lease term and records a lease charge for the lease liabilities to be incurred, net of any estimated sublease recoveries.

The Company determined the fair value of restaurant equipment, for those restaurants reviewed for impairment, based on current economic conditions and the Company’s history of using these assets in the operation of its business. These fair value asset measurements rely on significant unobservable inputs and are considered Level 3 in the fair value hierarchy.

During the three months ended ~~September 28, 2014~~,March 29, 2015, the Company recorded other lease charges of ~~$0.3~~$1.2 million associated with the closure of ~~two~~eight of the Company's restaurants in the ~~third~~first quarter of ~~2014~~2015 and asset impairment charges of ~~$0.4~~$0.5 million, including $0.3 million of capital expenditures at previously impaired restaurants.

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CARROLS RESTAURANT GROUP, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(in thousands of dollars except share and per share amounts)

During the ~~nine~~three months ended~~September 28,~~ March 30, 2014,, the Company recorded other lease charges of ~~$0.8~~$0.4 million ~~related to~~associated with the closure of ~~three~~one of the Company's restaurants ~~including $0.1 million to terminate an operating lease,~~in the first quarter of 2014 and impairment charges of ~~$1.0~~$0.2 million consisting ~~of approximately~~ ~~$0.6 million~~ of capital expenditures at previously impaired ~~restaurants and approximately~~ ~~$0.5 million~~ ~~related to initial impairment charges for~~ ~~five~~ ~~underperforming~~ restaurants.

The following table presents the activity in the ~~closed-restaurant reserve~~accrual for ~~the~~ ~~nine months endedSeptember 28, 2014~~ ~~and year ended December 29, 2013:~~closed restaurant locations:


	Nine Months Ended			Year Ended			Three Months Ended			Year Ended
	September 28, 2014			December 29, 2013			March 29, 2015			December 28, 2014
Balance, beginning of the period	$	1,466		$	—		$	1,721		$	1,466
Provisions for restaurant closures	604			1,616			1,170			724
Changes in estimates of accrued costs							(32		)	87
Payments, net	(479		)	(242		)	(251		)	(721		)
Other adjustments, including the effect of discounting future obligations and changes in estimates	75			92
Other adjustments, including the effect of discounting future obligations							42			165
Balance, end of the period	$	1,666		$	1,466		$	2,650		$	1,721

5. ~~Goodwill, Franchise Rights, Favorable~~Other Liabilities, Long-Term

Other liabilities, long-term, at March 29, 2015 and ~~Unfavorable Leases~~

~~Goodwill.~~ The Company is required to review goodwill for impairment annually, or more frequently, when events and circumstances indicate that the carrying amount may be impaired. If the determined fair value of goodwill is less than the related carrying amount, an impairment loss is recognized. The Company performs its annual impairment assessment asDecember 28, 2014 consisted of the last day of its fiscal year and does not believe circumstances have changed since the last assessment date which would make it necessary to reassess its value. There were no goodwill impairment losses during the ~~three and nine months endedSeptember 28, 2014~~ ~~or the year ended~~ ~~December 29, 2013. The change in goodwill for the~~ ~~nine months endedSeptember 28, 2014~~ ~~is summarized below:~~following:

Balance at December 30, 2012 and December 29, 2013 $ 8,162
Acquisition of restaurants (Note 2) 55
Balance at September 28, 2014 $ 8,217



	March 29, 2015		December 28, 2014
Accrued occupancy costs	$	9,657	$	9,287
Accrued workers’ compensation and general liability claims	3,912		3,211
Deferred compensation	648		567
Long-term obligation to BKC for right of first refusal	753		939
Other	2,067		2,153
	$	17,037	$	16,157

~~Franchise Rights.~~ ~~Amounts allocated~~Accrued occupancy costs above include long-term obligations pertaining to ~~franchise rights for each acquisition of Burger King restaurants are amortized using the~~closed restaurant locations, contingent rent, and accruals to expense operating lease rental payments on a straight-line ~~method~~basis over the ~~average remaining term~~lease term.

6. Long-term Debt

Long-term debt at March 29, 2015 and December 28, 2014 consisted of the ~~acquired franchise agreements plus one~~following:



	March 29, 2015			December 28, 2014
Collateralized:
Carrols Restaurant Group 11.25% Senior Secured Second Lien Notes	$	150,000		$	150,000
Capital leases	8,384			8,694
	158,384			158,694
Less: current portion	(1,293		)	(1,272		)
	$	157,091		$	157,422

Senior Secured Second Lien Notes. ~~twenty~~On May 30, 2012, Carrols Restaurant Group issued $150.0 million of 11.25% Senior Secured Second Lien Notes due 2018 (the "Notes") pursuant to an indenture dated as of May 30, 2012 governing such Notes. The Company repurchased and redeemed these Notes in the second quarter of 2015 as part of a refinancing. See Note 12 - Subsequent Events.~~-year renewal period.~~

The Notes were payable on May 15, 2018. Interest was payable semi-annually on May 15 and November 15. The Notes were guaranteed by the Company’s subsidiaries and were secured by second-priority liens on substantially

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CARROLS RESTAURANT GROUP, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(in thousands of dollars except share and per share amounts)

The Company assesses the potential impairment of franchise rights whenever events or changes in circumstances indicate that the carrying value may not be recoverable. If an indicator of impairment exists, an estimate of the aggregate undiscounted cash flows from the acquired restaurants is compared to the respective carrying value of franchise rights for each acquisition. If an asset is determined to be impaired, the loss is measured by the excess of the carrying amount of the asset over its fair value. No impairment charges were recorded related to the Company’s franchise rights during the ~~three and nine months endedSeptember 28, 2014~~ ~~or the year ended~~ ~~December 29, 2013. The change in franchise rights for the~~ ~~nine months endedSeptember 28, 2014~~ ~~is summarized below:~~

Balance at December 29, 2013 $ 90,168
Acquisition of restaurants (Note 2) 9,011
Amortization expense (3,187 )
Balance at September 28, 2014 $ 95,992

~~Amortization expense related to franchise rights was~~ ~~$1.1 million~~ ~~and $1.0 million in the~~ ~~three months endedSeptember 28, 2014~~ ~~and~~ ~~September 29, 2013, respectively, and $3.2 million and $3.1 million in the nine months ended~~ ~~September 28, 2014~~ ~~and~~ ~~September 29, 2013, respectively. The Company estimates the annual amortization expense of franchise rights recorded at~~ ~~September 28, 2014~~ ~~to be~~ ~~$4.3 million~~ in ~~2014, $4.5 million in~~ ~~2015, and $4.4 million in~~ ~~2016~~, ~~2017~~, ~~2018~~ ~~and~~ ~~2019~~.

~~Favorable and Unfavorable Leases.~~ Amounts allocated to favorable and unfavorable leases are being amortized using the straight-line method over the remaining terms of the underlying lease agreements as a net reduction of restaurant rent expense.

~~The net reduction of rent expense related to the amortization of favorable and unfavorable leases for both the~~ ~~three months endedSeptember 28, 2014~~ ~~and~~ ~~September 29, 2013~~ ~~was~~ ~~$0.2 million, and was $0.5 million for both the nine months ended~~ ~~September 28, 2014~~ ~~and~~ ~~September 29, 2013. The Company expects the annual net reduction of rent expense from the amortization of favorable and unfavorable leases to be~~ ~~$0.6 million~~ in ~~2014, $0.5 million in~~ ~~2015~~ ~~and~~ ~~2016~~, ~~$0.4 million~~ in ~~2017~~ ~~and~~ ~~2018, and $0.3 million in~~ ~~2019~~.

~~6. Long-term Debt~~

~~Long-term debt at~~ ~~September 28, 2014~~ ~~and~~ ~~December 29, 2013~~ ~~consisted of the following:~~

September 28, 2014 December 29, 2013
Collateralized:
Carrols Restaurant Group 11.25% Senior Secured Second Lien Notes $ 150,000
$ 150,000
Senior Credit Facility - Revolving credit borrowings —
—
Capital leases 7,529
9,336
157,529
159,336
Less: current portion (1,067 ) (1,147 )
$ 156,462
$ 158,189

~~Senior Secured Second Lien Notes.~~ ~~On May 30, 2012, Carrols Restaurant Group issued~~ ~~$150.0 million~~ of ~~11.25%~~ ~~Senior Secured Second Lien Notes due 2018 (the "Notes") pursuant to an indenture dated as of May 30, 2012 governing such Notes.~~

The Notes mature and are payable on May 15, 2018. Interest is payable semi-annually on May 15 and November 15. The Notes are guaranteed by the Company’s subsidiaries and are secured by second-priority liens on substantially all of the Company’s and its subsidiaries’ assets (including a pledge of all of the capital stock and equity interests of its subsidiaries).

The Notes ~~are~~were redeemable at the option of the Company in whole or in part at any time after May 15, 2015 at a price of 105.625% of the principal amount plus accrued and unpaid interest, if any, if redeemed before May 15, 2016, 102.813% of the principal amount plus accrued and unpaid interest, if any, if redeemed after May 15, 2016 but before May 15, 2017 and 100% of the principal amount plus accrued and unpaid interest, if any, if redeemed after May 15, 2017. Prior to May 15, 2015, the Company ~~may~~was able to redeem some or all of the Notes at a redemption price of 100% of the principal amount of each note plus accrued and unpaid interest, if any, and a make-whole premium. In addition, the indenture governing the Notes also ~~provides~~provided that the Company ~~may~~was able to redeem up to 35% of the Notes using the proceeds of certain equity offerings completed before May 15, 2015.

The Notes ~~are~~were jointly and severally guaranteed, unconditionally and in full by the Company's subsidiaries which are directly or indirectly 100% owned by the Company. Separate condensed consolidating information is not included because the Company

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~~CARROLS RESTAURANT GROUP, INC.~~

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)~~

~~(in thousands of dollars except share and per share amounts)~~

is a holding company that has no independent assets or operations. There are no significant restrictions on the ability of the Company or any of the guarantor subsidiaries to obtain funds from its respective subsidiaries. All consolidated amounts in the Company's financial statements are representative of the combined guarantors.

The indenture governing the Notes ~~includes~~included certain covenants, including limitations and restrictions on the Company and all of its subsidiaries who ~~are~~were guarantors under such indenture to, among other things: incur indebtedness or issue preferred stock; incur liens; pay dividends or make distributions in respect of capital stock or make certain other restricted payments or investments; sell assets; agree to payment restrictions affecting certain subsidiaries; enter into transaction with affiliates; or merge, consolidate or sell substantially all of the Company's assets.

The indenture governing the Notes and the security agreement ~~provide~~provided that any capital stock and equity interests of any of the Company's subsidiaries ~~will~~was to be excluded from the collateral to the extent that the par value, book value or market value of such capital stock or equity interests ~~exceeds~~ exceeded 20% of the aggregate principal amount of the Notes then outstanding.

The indenture governing the Notes ~~contains~~contained customary default provisions, including without limitation, a cross default provision pursuant to which it iswas an event of default under the Notes and the indenture if there iswas a default under any indebtedness of the Company having an outstanding principal amount of ~~$15.0~~$15.0 million or more which results in the acceleration of such indebtedness prior to its stated maturity or iswas caused by a failure to pay principal when due. The Company was in compliance as of ~~September 28, 2014~~March 29, 2015 with the restrictive covenants of the indenture governing the Notes.

Senior Credit Facility. On May 30, 2012, the Company entered into a senior credit facility, which provides for aggregate revolving credit borrowings of up to ~~$20.0~~$20.0 million (including ~~$15.0~~$15.0 million available for letters of credit) maturing on May 30, 2017. The senior credit facility also ~~provides~~provided for potential incremental borrowing increases of up to ~~$25.0~~$25.0 million,, in the aggregate. At ~~September 28, 2014~~,March 29, 2015, there were no revolving credit borrowings outstanding under the senior credit facility. On April 29, 2015 the Company amended its senior credit facility. See Note 12 - Subsequent Events.

~~Under~~On December 19, 2014 the Company entered into an amendment to the senior credit facility which revised certain financial ratios, including the Fixed Charge Coverage Ratio and Adjusted Leverage Ratio (all ~~terms not otherwise~~as defined ~~herein are defined in~~under the ~~Company's~~first amendment to the senior credit facility),. Additionally, the amendment requires the Company ~~has deposited~~ ~~$20.0 million~~to have no outstanding borrowings for a consecutive 30-day period during each trailing twelve month period.

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CARROLS RESTAURANT GROUP, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(in ~~an account with the Administrative Agent as collateral for the senior credit facility until the date~~thousands of dollars except share and per share amounts)

Effective on ~~which its Adjusted Leverage Ratio is less than~~ ~~6.00x for two consecutive fiscal quarters (the “Cash Collateral Release Date"). This amount is classified as restricted cash on the Company's consolidated balance sheet as of~~ ~~September 28,~~December 19, 2014,.

~~Prior to the Cash Collateral Release Date, revolving credit~~ borrowings under the senior credit facility ~~bear~~bore interest at a rate per annum, at the Company’s option, of:

(i) the Alternate Base Rate plus the applicable margin of ~~0.75%~~2.50% to 3.25% based on the Company’s Adjusted Leverage Ratio, or

(ii) the LIBOR Rate plus the applicable margin of ~~1.75%~~

~~Following the Cash Collateral Release Date, borrowings under the senior credit facility will bear interest at a rate per annum, at the Company’s option, of~~

~~(i) the Alternate Base Rate plus the applicable margin of~~ ~~2.50%~~3.50% to ~~3.25%~~4.25% based on the Company’s Adjusted Leverage ~~Ratio, or~~Ratio.

~~(ii)~~At March 29, 2015 the Company's LIBOR ~~Rate plus the applicable~~rate margin of ~~3.50%~~ to was 4.25% based on the ~~Company’s~~Company's Adjusted Leverage ~~Ratio.~~Ratio at that date.

The Company’s obligations under the senior credit facility are guaranteed by its subsidiaries and are secured by first priority liens on substantially all of the assets of the Company and its subsidiaries, including a pledge of all of the capital stock and equity interests of its subsidiaries.

Under the senior credit facility, the Company will be required to make mandatory prepayments of borrowings in the event of dispositions of assets, debt issuances and insurance and condemnation proceeds (all subject to certain exceptions).

The senior credit facility contains certain covenants, including without limitation, those limiting the Company’s and its subsidiaries' ability to, among other things, incur indebtedness, incur liens, sell or acquire assets or businesses, change the character of its business in all material respects, engage in transactions with related parties, make certain investments, make certain restricted payments or pay dividends. In addition, the senior credit facility requires the Company to meet certain financial ratios, including a Fixed Charge Coverage Ratio and Adjusted Leverage Ratio (all as defined under the senior credit ~~facility); provided, however that the~~facility, as amended). The Company ~~is not required to be~~was in compliance with ~~such ratios so long as~~the covenants under the senior credit facility ~~is cash collateralized.~~at March 29, 2015.

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~~CARROLS RESTAURANT GROUP, INC.~~

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)~~

~~(in thousands of dollars except share and per share amounts)~~

The senior credit facility contains customary default provisions, including that the lenders may terminate their obligation to advance and may declare the unpaid balance of borrowings, or any part thereof, immediately due and payable upon the occurrence and during the continuance of customary defaults which include, without limitation, payment default, covenant defaults, bankruptcy type defaults, cross-defaults on other indebtedness, judgments or upon the occurrence of a change of control.

After reserving ~~$7.6~~$12.0 million for letters of credit issued under the senior credit facility for workers’ compensation and other insurance policies, ~~$12.4~~$8.0 million was available for revolving credit borrowings under the senior credit facility at ~~September 28, 2014~~.March 29, 2015.

7. Income Taxes

The benefit for income taxes for the three ~~and nine~~ months ended~~September 28,~~ March 29, 2015 and March 30, 2014 ~~and~~ ~~September 29, 2013~~ was comprised of the following:


	Three Months Ended						Nine Months Ended						Three Months Ended
	September 28, 2014			September 29, 2013			September 28, 2014			September 29, 2013			March 29, 2015			March 30, 2014
Current	$	—		$	(4,269	)	$	219		$	(4,282	)	$	—		$	32
Deferred	(2,632		)	2,532			(7,774		)	(4,438		)	(3,739		)	(3,790		)
Valuation allowance													3,739			—
	$	(2,632	)	$	(1,737	)	$	(7,555	)	$	(8,720	)	$	—		$	(3,758	)

The benefit for income taxes for the three ~~and nine~~ months ended~~September 28,~~ March 30, 2014 was derived using an estimated effective annual income tax rate for 2014 of ~~37.5%~~33.9%, which excluded any discrete tax adjustments. ~~The Company's estimated effective tax rate for 2014 does not include any Work Opportunity Tax Credits for qualifying employees hired in~~ ~~2014~~ as this expired at the end of 2013. The credit for such employees will be reflected in the Company's estimated effective tax rate in the period when and if re-enacted into law. Other discrete tax adjustments increased the benefit for income taxes by $0.5 million and $0.6 million in the ~~three and nine months endedSeptember 28, 2014, respectively, which included $0.5 million in employment tax credits relating to periods prior to the tax credit's expiration.~~

~~The benefit for income taxes for the~~ ~~three and nine months endedSeptember 29, 2013~~ ~~was derived using an estimated effective annual income tax rate for~~ ~~2013~~ of 39.9%, which excluded any discrete tax adjustments. In January 2013, the United States Congress authorized, and the President signed into law, certain federal tax credits that were reflected in the Company's Federal tax return for 2012. However, since the law was enacted in 2013, the financial statement benefit of such credits totaling $1.0 million was recorded in the first quarter of 2013 and is included in the benefit for income taxes in the consolidated statement of operations and comprehensive loss for the ~~nine months endedSeptember 29, 2013. Other discrete tax adjustments increased the benefit for income taxes by $0.1 million in the three months ended~~ ~~September 29, 2013~~ ~~and decreased the benefit for income taxes by $0.3 million for the nine months ended~~ ~~September 29, 2013~~.

The Company ~~establishes a valuation allowance when it is necessary to reduce deferred tax assets to~~performed an ~~amount for which realization is likely. The Company has performed the required~~ assessment of positive and negative evidence regarding the realization of its deferred income tax assets ~~in accordance with~~at December 28, 2014 as required by ASC 740. The Company considered all available positive and negative evidence to determine whether, based on the weight of that evidence, a valuation allowance is needed for some portion or all of its deferred income tax assets. Judgment is used in considering the relative impact of negative and positive evidence. In arriving at these judgments,Under ASC 740, the weight given to ~~the potential effect of~~ negative and ~~positive evidence is commensurate with the extent to which such evidence can be objectively verified.~~

In evaluating the objective evidence provided by historical results, the Company considered (among other things) the past three years of cumulative losses, projected reversal of deferred tax liabilities, recent and prospective operating results, the ability to carry-back net operating losses generated through December 30, 2012 against taxable income reported in prior years, and that the first year of expiration of its net operating loss carryforwards is 2033. The Company also considered subjective evidence related to the forecast of expected operating results for the years over the carryforward period. Additionally, the deferred tax liabilities the Company has considered in the assessment of the realization of deferred tax assets will reverse in the carryforward period and same jurisdiction. While the Company’s performance for the nine months ended ~~September 28, 2014~~ did not meet previous projections, management has considered the financial results in the third quarter compared to the first and second quarter of 2014, as well as the potential accretive impact of closing underperforming restaurants and acquiring additional restaurants in 2014 within its forecast of their future performance. Based on the analysis of positive and negative evidence, the Company believed that there was enough positive evidence to overcome its cumulative loss position at ~~September 28, 2014, and therefore no valuation allowance of its deferred tax assets of $17.7 million was necessary. As disclosed in Note 1, the Company has acquired 94 restaurants in the~~

1211

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CARROLS RESTAURANT GROUP, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(in thousands of dollars except share and per share amounts)

positive evidence is commensurate only to the extent that such evidence can be objectively verified. ASC 740 also prescribes that objective historical evidence, in particular the Company’s three-year cumulative loss position at December 28, 2014, be given greater weight than subjective evidence, including the Company’s forecasts of future taxable income, which include assumptions that cannot be objectively verified. The Company determined, based on the required weight of that evidence under ASC 740, that a valuation allowance was needed for all of its net deferred income tax assets at December 28, 2014. As a result, the Company recorded a valuation reserve of $24.3 million in the fourth quarter of 2014. ~~Management recognizes that~~

For the ~~future performance of such restaurants, and~~three months ended March 29, 2015 the ~~judgments associated with projected cash flows~~Company increased its valuation reserve by $3.7 million for ~~the 2014 acquisitions are impactful to the Company's analysis of positive and negative evidence, and~~ its ~~continued evaluation of the recoverability of~~incremental net deferred income tax ~~assets. In future periods, if~~assets in the ~~negative evidence outweighs the positive evidence,~~period. Consequently, the Company ~~would need to record a~~recorded no benefit from income taxes in the three months ended March 29, 2015. At March 29, 2015, the Company's valuation allowance ~~equal to the full amount of the~~on all its net deferred tax ~~asset balance~~assets was $31.2 million, which included $3.5 million related to certain state net operating loss carryforwards.

The Company's federal net operating loss carryforwards expire beginning in 2033. As of March 29, 2015, the Company had federal net operating loss carryforwards of approximately $40.8 million.

The estimation of future taxable income for federal and state purposes and the Company's ability to realize deferred tax assets can significantly change based on future events and operating results. Thus, recorded valuation allowances may be subject to future changes that could have a material impact on the consolidated financial statements. If the Company determines that it is more likely than not that it will realize these deferred tax assets in the future, the Company will make an adjustment to the valuation allowance at that time.

The ~~Company will continue~~Company's policy is to ~~monitor and evaluate the positive and negative evidence considered in arriving at the above conclusion, in order to assess whether such conclusion remains appropriate in future periods.~~

~~The Company recognizes~~recognize interest ~~and~~and/or penalties related to uncertain tax positions in income tax expense. ~~As of~~ ~~September~~At March 29, 2015 and December 28, 2014, ~~and~~ ~~December 29, 2013~~, the Company had no unrecognized tax benefits and no accrued interest related to uncertain tax positions.

The tax ~~year 2013~~years 2009 - 2014 remains open to examination by the major taxing jurisdictions to which the Company is subject. In 2014, the Company concluded an examination of its consolidated federal income tax return for the tax years 2009 through 2012. Although it is not reasonably possible to estimate the amount by which unrecognized tax benefits may increase within the next twelve months due to the uncertainties regarding the timing of any examinations, the Company does not expect unrecognized tax benefits to significantly change in the next twelve months.

8. ~~Other Liabilities, Long-Term~~Stock-Based Compensation

~~Other liabilities, long-term, at~~ ~~September 28,~~Stock-based compensation expense in both the three months ended March 29, 2015 and March 30, 2014 ~~and~~ ~~December~~ was $0.3 million. As of March 29, ~~2013~~ ~~consisted~~2015, the total unrecognized stock-based compensation expense relating to non-vested shares was approximately $3.5 million, which the Company expects to recognize over a remaining weighted average vesting period for non-vested shares of 2.7 years. The Company expects to record an additional $1.1 million as compensation expense for the remainder of 2015.

On January 15, 2015, the Company granted 274,200 non-vested shares to officers of the ~~following:~~Company. These shares vest and become non-forfeitable 25% per year and are being expensed over their four-year vesting period. On March 27, 2015, the Company granted 11,905 non-vested shares to a new member of the board of directors of the Company. These shares vest and become non-forfeitable 20% per year and are being expensed over their five-year vesting period.

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CARROLS RESTAURANT GROUP, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(in thousands of dollars except share and per share amounts)

A summary of all non-vested shares activity for the three months ended March 29, 2015 was as follows:

September 28, 2014 December 29, 2013
Accrued occupancy costs $ 8,802
$ 7,793
Accrued workers’ compensation and general liability claims 3,196
2,272
Deferred compensation 517
353
Long-term obligation to BKC for right of first refusal 1,123
1,672
Other 2,108
2,780
$ 15,746
$ 14,870



	Shares		Weighted Average Grant Date Price
Non-vested at December 28, 2014	395,427		$	6.68
Granted	286,105		8.15
Vested	(68,563	)	10.11
Forfeited	(9,706	)	6.18
Nonvested at March 29, 2015	603,263		$	6.99

~~Accrued occupancy costs above include long-term obligations pertaining to closed restaurant locations, contingent rent, and accruals to expense operating lease rental payments~~The fair value of the non-vested shares is based on ~~a straight-line basis over~~ the ~~lease term.~~closing price on the date of grant.

9. Commitments and Contingencies

Lease Guarantees. Fiesta Restaurant Group, Inc. ("Fiesta"), a former wholly-owned subsidiary of the Company, was spun-off in 2012 to the Company's stockholders. As of ~~September 28, 2014~~,March 29, 2015, the Company is a guarantor under 3331 Fiesta restaurant property leases, with lease terms expiring on various dates through 2030, and is the primary lessee on five Fiesta restaurant property leases, which it subleases to Fiesta. The Company is fully liable for all obligations under the terms of the leases in the event that Fiesta fails to pay any sums due under the lease, subject to indemnification provisions of the Separation and Distribution Agreement entered into in connection with the spin-off of Fiesta.

The maximum potential amount of future undiscounted rental payments the Company could be required to make under these leases at ~~September 28, 2014~~March 29, 2015 was ~~$39.9 million~~.$36.5 million. The obligations under these leases will generally continue to decrease over time as these operating leases expire. No payments related to these guarantees have been made by the Company to date and none are expected to be required to be made in the future. The Company has not recorded a liability for these guarantees in accordance with ASC 460 - Guarantees as Fiesta has indemnified the Company for all such obligations and the Company did not believe it was probable it would be required to perform under any of the guarantees or direct obligations.

Litigation. The Company is a party to various litigation matters that arise in the ordinary course of business. The Company does not believe that the outcome of any of these matters meet the disclosure or recognition standards, nor will they have a material adverse effect on its consolidated financial statements.

10. Transactions with Related Parties

In 2012, the Company issued to BKC 100 shares of Series A Convertible Preferred Stock which is convertible into 9,414,580 shares or ~~28.9%~~of Carrols Restaurant Group Common Stock, which currently constitutes approximately 21.0% of the outstanding shares of the Company's common stock ~~calculated on the date of the closing of the 2012 acquisition~~ on a fully diluted basis. As a result of the acquisition of restaurants from BKC in 2012, ~~acquisition,~~ BKC has two representatives on the Company's board of directors.

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~~CARROLS RESTAURANT GROUP, INC.~~

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)~~

~~(in thousands of dollars except share and per share amounts)~~

Each of ~~our Burger King~~the Company's restaurants operates under a separate franchise agreement with BKC. These franchise agreements generally provide for an initial term of twenty years and currently have an initial franchise fee of fifty thousand dollars. Any franchise agreement, including renewals, can be extended at the Company's discretion for an additional 20 year term, with BKC's approval, provided that, among other things, the restaurant meets the current Burger King image standard and the Company is not in default under terms of the franchise agreement.

In addition to the initial franchise fee, the Company generally pays BKC a monthly royalty at a rate of ~~4.5~~%4.5% of sales. Royalty expense was ~~$7.6~~$8.1 million and ~~$7.1~~$6.3 million in the three months ended ~~September 28,~~March 29, 2015 and March 30, 2014, ~~and~~ ~~September 29, 2013, respectively, and $21.0 million and $20.7 million in the nine months ended~~ ~~September 28, 2014~~ ~~and~~ ~~September 29, 2013~~, respectively.

The Company is also generally required to contribute 4%4% of restaurant sales from ~~our~~its Burger King restaurants to an advertising fund utilized by BKC for its advertising, promotional programs and public relations activities, and additional amounts for participation in local advertising campaigns in markets that approve such additional spending. Advertising expense related to BKC was ~~$6.8~~$7.2 million and ~~$7.3~~$6.4 million in the three months ended ~~September 28,~~March 29, 2015 and March 30, 2014, respectively.

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CARROLS RESTAURANT GROUP, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(in thousands of dollars except share and ~~September 29, 2013, respectively and $20.3 million and $22.0 million in the nine months ended~~ ~~September 28, 2014~~ ~~and~~ ~~September 29, 2013, respectively.~~per share amounts)

As of ~~September 28, 2014~~,March 29, 2015, the Company leased ~~290~~303 of its restaurant locations from BKC and for ~~188~~176 of these locations the terms and conditions of the lease with BKC are identical to those between BKC and the third-party lessor. Aggregate rent under ~~all~~these BKC leases for the three months ended ~~September 28,~~March 29, 2015 and March 30, 2014 ~~and~~ ~~September 29, 2013~~ was ~~$6.7 million~~ ~~and~~ ~~$6.6 million, respectively, and $19.6~~$7.3 million and ~~$20.0~~$6.4 million, ~~in the nine months ended~~ ~~September 28, 2014~~ ~~and~~ ~~September 29, 2013~~, respectively. The Company believes the related party lease terms ~~for all of its leases with~~have not been significantly affected by the fact that the Company and BKC are ~~commercially reasonable and are on an arms-length basis.~~deemed related parties.

As of ~~September 28, 2014~~,March 29, 2015, the Company owed BKC ~~$1.9~~$1.5 million associated with ~~the assignment~~its purchase of ~~its~~BKC's right of first refusal in 20 states as part of the acquisition of restaurants from BKC in 2012 and ~~$3.7~~$6.0 million related to the ~~monthly~~ payment of advertising, royalties and ~~rent.~~rent, which is remitted on a monthly basis.

11. ~~Other Income~~

~~In the nine months ended~~ ~~September 29, 2013, the Company recorded a gain of $0.2 million related to business interruption insurance recoveries from a fire at a restaurant.~~

~~12.~~ Net Loss per Share

The Company applies the two-class method to calculate and present net loss per share. The Company's non-vested share awards and Series A Convertible Preferred Stock issued to BKC contain non-forfeitable rights to dividends and are considered participating securities for purposes of computing net loss per share pursuant to the two-class method. Under the two-class method, net earnings are reduced by the amount of dividends declared (whether paid or unpaid) and the remaining undistributed earnings are then allocated to common stock and participating securities, based on their respective rights to receive dividends. However, as the Company ~~has~~ incurred net losses for the three ~~and nine~~ months ended ~~September 28,~~March 29, 2015 and March 30, 2014, ~~and~~ ~~September 29, 2013~~, and as those losses are not allocated to the participating securities under the two-class method, such method is not applicable for the aforementioned reporting periods.

Basic net loss per share is computed by dividing net income available to common shareholders by the weighted average number of shares of common stock outstanding for the reporting period. Diluted net loss per share reflects additional shares of common stock outstanding, where applicable, calculated using the treasury stock method or the two-class method.

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~~CARROLS RESTAURANT GROUP, INC.~~

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)~~

~~(in thousands of dollars except share and per share amounts)~~

The following table sets forth the calculation of basic and diluted net loss per share:


	Three Months Ended						Nine Months Ended						Three Months Ended
	September 28, 2014			September 29, 2013			September 28, 2014			September 29, 2013			March 29, 2015			March 30, 2014
Basic and diluted net loss per share:
Net loss	$	(1,721	)	$	(2,762	)	$	(11,082	)	$	(11,457	)	$	(9,276	)	$	(7,429	)
Basic and diluted weighted average common shares outstanding	34,797,490			23,020,529			29,571,846			22,929,505			34,882,302			23,151,523
Basic and diluted net loss per share	$	(0.05	)	$	(0.12	)	$	(0.37	)	$	(0.50	)	$	(0.27	)	$	(0.32	)
Common shares excluded from diluted net loss per share computation (1)	9,813,285			10,066,823			9,813,285			10,066,823			10,017,843			9,950,261


(1)	Shares issuable upon conversion of preferred stock and non-vested shares were excluded from the computation of diluted net loss per share because their effect would have been anti-dilutive.

~~13. Public Offering~~12. Subsequent Events

On April ~~30, 2014~~,29, 2015, the Company ~~completed an underwritten public offering~~issued $200 million of ~~10.0 million~~ ~~shares~~8% senior secured second lien notes due 2022 (the "New Notes") and used a portion of ~~common stock at~~the proceeds to repurchase all of its outstanding Notes tendered pursuant to a ~~price~~cash tender offer and related consent solicitation (or through a redemption of ~~$6.20~~ ~~per share (the "Public Offering").~~any such Notes not purchased in the tender offer) and to pay related fees and expenses. The Company ~~also issued and sold an additional~~ ~~1.5 million~~ shares of common stock pursuant to the underwriters exercise of the option to purchase additional shares at the same terms and conditions as offered in the Public Offering, for a total share issuance of ~~11.5 million~~ ~~shares. All shares were issued and sold by the Company and~~will use the net proceeds ~~received were approximately~~ ~~$67.3 million~~ infrom the ~~aggregate after deducting underwriting discounts and commissions and offering expenses.~~

~~The Company is using the net proceeds~~sale of the ~~Public Offering~~New Notes for working capital and general corporate purposes, including potential acquisitions and capital expenditures to ~~accelerate~~remodel restaurants.

On April 29, 2015, the ~~remodeling~~Company entered into an amendment to its senior credit facility to increase aggregate revolving credit borrowings by $10.0 million to $30.0 million (including an increase of $5.0 million to $20.0 million available for letters of credit). The amended senior credit facility has a five-year maturity, permits potential incremental increases in revolving credit borrowings of up to $25.0 million, subject to approval by the lenders, amends certain financial ratios which the Company must maintain and reduces the interest rate for revolving credit borrowings to, at

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CARROLS RESTAURANT GROUP, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(in thousands of dollars except share and per share amounts)

the Company's ~~restaurants~~option, (i) the alternate base rate plus the applicable margin of 2.0% to ~~Burger King Corporation's 20/20 restaurant image,~~2.75% based on the Company's total lease adjusted leverage ratio, or (ii) the LIBOR rate plus the applicable margin of 3.0% to ~~acquire additional franchised Burger King restaurants, and, to a lesser extent, develop new restaurants and for other general corporate purposes.~~

~~A shelf registration statement (including a prospectus) relating to these securities was filed by~~3.75% based on the ~~Company with~~Company's total lease adjusted leverage ratio (all as defined under the ~~Securities and Exchange Commission (“SEC”) and was declared effective by the SEC on April 9, 2014.~~

amended senior credit facility).

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ITEM 2—MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Throughout this Quarterly Report on Form 10-Q, we refer to Carrols Restaurant Group, Inc. as “Carrols Restaurant Group” and, together with its consolidated subsidiaries, as “we”, “our” and “us” unless otherwise indicated or the context otherwise requires. Any reference to “Carrols” refers to our wholly-owned subsidiary, Carrols Corporation, a Delaware corporation, and its consolidated subsidiaries, unless otherwise indicated or the context otherwise requires. Any reference to "Carrols LLC" refers to Carrols' wholly-owned subsidiary, Carrols LLC, a Delaware limited liability company.

We use a 52-53 week fiscal year ending on the Sunday closest to December 31. The fiscal year ended December ~~29, 2013~~28, 2014 contained 52 weeks and the three ~~and nine~~ months ended~~September 28,~~ March 29, 2015 and March 30, 2014 ~~and~~ ~~September 29, 2013~~ each contained thirteen weeks. The current fiscal year will end January 3, 2016 and ~~thirty-nine weeks, respectively.~~will contain 53 weeks.

Introduction

We are a holding company and conduct all of our operations through our direct and indirect subsidiaries and have no assets other than the shares of capital stock of Carrols, our direct wholly-owned subsidiary. The following Management's Discussion and Analysis of Financial Condition and Results of Operations (or "MD&A") is written to help the reader understand our company. The MD&A is provided as a supplement to, and should be read in conjunction with our unaudited interim Consolidated Financial Statements and the accompanying financial statement notes appearing elsewhere in this report and our Annual Report on Form 10-K ~~as amended,~~ for the year ended December ~~29, 2013~~.28, 2014. The overview provides our perspective on the individual sections of MD&A, which include the following:

Company Overview—a general description of our business and our key financial measures.

Recent and Future Events Affecting Our Results of Operations—a description of recent events that affect, and future events that may affect, our results of operations.

Operating Results from Operations—an analysis of our results of operations for the three ~~and nine~~ months ended~~September 28, 2014~~ March 29, 2015 compared to the three ~~and nine~~ months ended~~September 29, 2013~~ March 30, 2014 including a review of material items and known trends and uncertainties.

Liquidity and Capital Resources—an analysis of historical information regarding our sources of cash and capital expenditures, the existence and timing of commitments and contingencies, changes in capital resources and a discussion of cash flow items affecting liquidity.

Application of Critical Accounting Policies—an overview of accounting policies requiring critical judgments and estimates.

Effects of New Accounting Standards—a discussion of new accounting standards and any implications related to our financial statements.

Forward Looking Statements—cautionary information about forward-looking statements and a description of certain risks and projections.

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Company Overview

We are one of the largest restaurant companies in the United States and have been operating restaurants for more than 50 years. We are the largest Burger ~~King ®~~King® franchisee in the ~~world~~United States, based on number of restaurants, and have operated Burger King restaurants since 1976. As of ~~September 28, 2014~~,March 29, 2015, we operated ~~581~~659 Burger King restaurants in 1315 states. During the year ended December 28, 2014 we acquired 123 Burger King restaurants in five separate transactions, which we refer to as the “2014 acquired restaurants”. On May 30, 2012, we acquired 278 restaurants from Burger King Corporation ("BKC"), which we refer to as the "2012 acquired restaurants", including BKC's assignment of its right of first refusal on franchisee restaurant sales in 20 states (the "ROFR"). As of ~~September 28, 2014~~March 29, 2015 we were operating ~~263~~all of ~~such~~the restaurants acquired ~~restaurants. Additionally,~~ in 2014 and 252 of the ~~first nine months of~~ ~~2014~~ we2012 acquired ~~an additional 29 restaurants, which we refer to as the "2014 acquired restaurants".~~restaurants. All of our other Burger King restaurants are referred to as our "legacy restaurants".

The following is an overview of the key financial measures discussed in our results of operations:

Restaurant sales consist of food and beverage sales at our restaurants, net of discounts and excluding sales tax collected. Restaurant sales are influenced by changes in comparable restaurant sales, menu price increases, acquisitions, new restaurant ~~openings~~development and closures of restaurants. Restaurants, including restaurants we acquire, are included in comparable restaurant sales after they have been open for 12 months. For comparative purposes, the calculation of the changes in comparable restaurant sales is based on a 52-week year.

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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 mix of items sold and the effectiveness of our restaurant-level controls to manage food and paper costs.

Restaurant wages and related expenses include all restaurant management and hourly productive labor costs and related benefits, employer payroll taxes and restaurant-level bonuses. Payroll and related benefits are subject to inflation, including minimum wage increases and increased costs for health insurance, workers’ compensation insurance and federal and state unemployment insurance.

Restaurant rent expense includes base rent and contingent rent on our leases characterized as operating leases, the amortization of favorable and unfavorable leases and is reduced by the amortization of deferred gains on sale-leaseback transactions.

Other restaurant operating expenses include all other restaurant-level operating costs, the major components of which are royalty expenses paid to BKC, utilities, repairs and maintenance, real estate taxes and credit card fees.

Advertising expense includes all local marketing and promotional expenses including advertising payments to BKC based on a percentage of sales as required under our franchise agreements.

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 and (3) stock-based compensation expense.

EBITDA, Adjusted EBITDA and Restaurant-Level EBITDA. EBITDA, Adjusted EBITDA and Restaurant-Level EBITDA are non-GAAP financial measures. EBITDA represents net ~~income (loss)~~loss from operations, before benefit for income taxes, interest expense and depreciation and amortization. Adjusted EBITDA represents EBITDA as adjusted to exclude impairment and other lease charges, ~~EEOC litigation and settlement costs,~~ acquisition and integration costs and stock compensation expense. Restaurant-Level EBITDA represents ~~income (loss)~~loss from operations before general and administrative expenses, depreciation and amortization, impairment and other lease charges and other income and expense.

We are presenting Adjusted EBITDA and Restaurant-Level EBITDA because we believe that they provide a more meaningful comparison than EBITDA of our core business operating results, as well as with those of other similar companies. Additionally, we present Restaurant-Level EBITDA because it excludes the impact of general and administrative expenses and other income and expense which are not directly related to restaurant operations. Management believes that Adjusted EBITDA and Restaurant-Level EBITDA, when viewed with

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our results of operations in accordance with GAAP and the accompanying reconciliations on page ~~24,~~23, provide useful information about operating performance and period-over-period growth, and provide additional information that is useful for evaluating the operating performance of our core business without regard to potential distortions. Additionally, management believes that Adjusted EBITDA and Restaurant-Level EBITDA permit investors to gain an understanding of the factors and trends affecting our ongoing cash earnings, from which capital investments are made and debt is serviced.

However, EBITDA, Adjusted EBITDA and Restaurant-Level EBITDA are not measures of financial performance or liquidity under GAAP and, accordingly, should not be considered as alternatives to net loss, ~~income (loss)~~loss from operations or cash flow from operating activities as indicators of operating performance or liquidity. Also, these measures may not be comparable to similarly titled captions of other companies. For a reconciliation between net loss and EBITDA and Adjusted EBITDA and between Restaurant-Level EBITDA and ~~income (loss)~~loss from operations see page ~~24.~~23.

EBITDA, Adjusted EBITDA and Restaurant-Level EBITDA have important limitations as analytical tools. These limitations include the following:

EBITDA, Adjusted EBITDA and Restaurant-Level EBITDA do not reflect our capital expenditures, future requirements for capital expenditures or contractual commitments to purchase capital equipment;

EBITDA, Adjusted EBITDA and Restaurant-Level EBITDA do not reflect the interest expense or the cash requirements necessary to service principal or interest payments on our debt;

Although depreciation and amortization are non-cash charges, the assets that we currently depreciate and amortize will likely have to be replaced in the future, and EBITDA, Adjusted EBITDA and Restaurant-Level EBITDA do not reflect the cash required to fund such replacements; and

EBITDA, Adjusted EBITDA and Restaurant-Level EBITDA do not reflect the effect of earnings or charges resulting from matters that our management does not consider to be indicative of our ongoing operations. However, some of

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these charges (such as impairment and other lease charges and acquisition and integration costs) have recurred and may reoccur.

Depreciation and amortization primarily includes the depreciation of fixed assets, including equipment, owned buildings and leasehold improvements utilized in our restaurants, the amortization of franchise rights resulting from our acquisitions of restaurants and the amortization of franchise fees paid to BKC.

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. At ~~September 28, 2014~~,March 29, 2015, there were ~~$1.7~~$2.7 million of lease charges accrued for closed ~~restaurant~~ locations.

Interest expense consists primarily of interest expense associated with our 11.25% Senior Secured Second Lien Notes due 2018 (the "Notes"), amortization of deferred financing costs and revolving credit borrowings under our senior secured credit facility.

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Recent and Future Events Affecting our Results of Operations

~~Acquisitions~~Refinancing of Indebtedness

On April 29, 2015, we issued $200 million of 8% senior secured second lien notes due 2022 (the "New Notes") and used a portion of the net proceeds to repurchase all of our outstanding Notes tendered pursuant to a cash tender offer and related consent solicitation (or through a redemption of any such Notes that were not purchased in the tender offer) and to pay related fees and expenses. We expect the net proceeds of approximately $35 million will be used for working capital and general corporate purposes, including any potential acquisitions and capital expenditures to remodel our restaurants.

In connection with these transactions, on April 15, 2015 we commenced a cash tender offer and consent solicitation for all of our outstanding Notes. On April 29, 2015, $145.5 million of the Notes were accepted for payment and paid by us. On April 29, 2015, we called for the redemption of the $4.5 million of the Notes that were not tendered in the tender offer and irrevocably deposited with the trustee for the Notes an amount of funds sufficient to redeem such outstanding Notes. On April 29, 2015, we and the guarantors terminated our obligations under the Notes and under the indenture governing the Notes.

On April 29, 2015, we entered into an amendment to our senior credit facility to increase aggregate revolving credit borrowings by $10 million to $30.0 million (including an increase of $5.0 million to $20.0 million available for letters of credit). The amended senior credit facility has a five-year maturity, permits potential incremental increases in revolving borrowings of up to $25.0 million, subject to approval of the lenders, amends certain financial ratios which we must maintain and reduces the interest rate for revolving credit borrowings to, at our option, (i) the alternate base rate plus the applicable margin of 2.0% to 2.75% based on our total lease adjusted leverage ratio, or (ii) the LIBOR rate plus the applicable margin of 3.0% to 3.75% based on our total lease adjusted leverage ratio (all as defined under the amended senior credit facility).

As a result of the refinancing in the second quarter of 2015, we expect interest expense for the remaining three quarters of 2015 to be approximately $0.7 million lower than in the last nine months of 2014.

See —"Liquidity and Capital Resources" for a discussion of the New Notes and our senior credit facility, as amended.

2014 Burger King ~~Restaurants~~

~~2012 Acquisition~~

On ~~May 30, 2012, we acquired~~ ~~278~~ ~~restaurants from BKC including BKC’s assignment of its right of first refusal ("ROFR") on franchisee restaurant transfers in~~ 20 ~~states. We also agreed to remodel or otherwise upgrade~~ ~~455~~ ~~Burger King restaurant locations to BKC’s 20/20 restaurant image by the end of 2015. As of~~ ~~September 28, 2014, we had completed remodeling a total of~~ ~~255~~ ~~restaurants to the 20/20 restaurant image, including 54 completed in 2014 through the end of the third quarter. We currently anticipate remodeling a total of 100 to 110 restaurants in 2014.~~

~~2014~~Restaurant Acquisitions

WeIn the second quarter of 2014 we exercised our ROFR on April 30, 2014 and acquired four Burger King® restaurants ~~located~~ in the Fort Wayne, Indiana on ~~April 30, 2014~~market for a cash purchase price of $0.7 million. In the third quarter we exercised our ROFR on June 30, 2014 and acquired four Burger King® restaurants in the Pittsburgh, Pennsylvania market for a cash purchase price of $3.8 million ~~including~~which included one fee-owned property. Additionally, on July 22, 2014, we acquired in a negotiated transaction 21 Burger King® restaurants located in the Rochester, NY market and in the Southern Tier region of ~~Western~~western New York State for a cash purchase price of ~~$8.5 million~~.$8.6 million.

In the fourth quarter of 2014 we exercised our ROFR on October 8, 2014 and purchased 30 Burger King® restaurants ~~located~~ in the Wilmington, North Carolina and Greenville, North Carolina markets for a cash purchase price of approximately ~~$20.5~~$20.3 million, which included 12 fee-owned properties. Also on November 4, 2014, we ~~purchased~~acquired in a negotiated transaction 64 Burger King® restaurants in or around the Nashville, TN, Springfield, IL, Terre Haute, IN, and Evansville, IN markets for a cash purchase price of ~~$18.0 million~~ ~~excluding inventory. We are currently marketing~~$18.8 million. Ten of the thirteen fee-owned properties acquired in the 2014 acquisitions were sold in sale-leaseback transactions ~~eleven~~during the fourth quarter of 2014 and one in the first quarter of 2015 for total net proceeds of $14.1 million. The total fair value of fee-owned ~~restaurant~~ properties acquired in ~~2014.~~

~~Public Equity Offering~~

~~On April 30,~~the five 2014 we completed an underwritten public offering of 10.0 million shares of our common stock at a price of $6.20 per share (the "Public Offering"). We also issued and sold an additional 1.5 million shares of our common stock pursuant to the underwriters’ exercise of their option to purchase additional shares at the same terms and conditions as offered in the Public Offering, for a total share issuance of 11.5 million shares. All shares were issued and sold by us and our net proceeds were approximately $67.3 million after deducting underwriting discounts and commissions and offering expenses.

We are using the net proceeds of the Public Offering to accelerate the remodeling of our restaurants to BKC's 20/20 restaurant image, to acquire additional franchised Burger King restaurants, to a lesser extent to develop new Burger King restaurants and for other general corporate purposes. A shelf registration statement (including a prospectus) relating to these securitiesacquisitions was ~~filed by us with the Securities and Exchange Commission (“SEC”) and was declared effective by the SEC on April 9, 2014.~~$16.0 million.

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~~Beef Commodity Costs~~

~~Our largest component~~The pro forma impact on the results of ~~cost~~operations for the 2014 acquisitions is included below. The pro forma results of ~~sales is beef costs. Beef costs~~operations are not necessarily indicative of the results that would have ~~risen from $2.03/lb.~~occurred had the acquisitions been consummated at the beginning of the periods presented, nor are they necessarily indicative of any future consolidated operating results. The following table summarizes our unaudited pro forma operating results:



	Three Months Ended
	March 30, 2014
Restaurant sales	$	182,545
Loss from operations	$	(5,517	)
Adjusted EBITDA	$	5,575

2015 Capital Expenditures and Remodeling Commitment with BKC

On January 26, 2015, we entered into the First Amendment to Operating Agreement with BKC, in which we agreed to remodel to BKC's current 20/20 image a cumulative total of 329 restaurants by June 30, 2015, 410 restaurants by December 31, 2015 and 455 restaurants by December 31, 2016. In addition, in connection with our acquisition of 64 Burger King restaurants on November 4, 2014 we agreed to ~~$2.76/lb. at~~remodel 46 of these restaurants over the ~~end~~next five years beginning in 2014. As of ~~the third quarter~~March 29, 2015 we had remodeled a total of ~~2014 and increased over 30% in the third quarter of 2014 compared~~312 restaurants to the ~~third quarter~~20/20 restaurant image.

In 2015, we anticipate that total capital expenditures will range from $45 million to $50 million, although the actual amount of ~~2013. Given the current level~~capital expenditures may differ from these estimates. Capital expenditures in 2015 are expected to include approximately $32 million to $36 million for remodeling a total of ~~beef costs in 2014 we currently anticipate beef costs~~80 to ~~be higher in the first six months of 2015 compared~~90 restaurants to the ~~first six months~~BKC 20/20 image at an approximate average cost of ~~2014.~~$400,000 per restaurant, which includes $28,000 of discretionary investments in new kitchen equipment. We will continue to assess the number of restaurants we will remodel in 2015 in relation to our available capital resources and acquisition opportunities.

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 in relation to its cash flow and future occupancy costs, and with regard to franchise agreement renewals, the cost of required capital improvements. We may elect to close restaurants based on these evaluations.

In ~~2013~~,2014, we closed ~~ten~~13 restaurants excluding one restaurant relocated within its market area. In the first ~~nine~~ ~~months~~quarter of ~~2014~~2015 we ~~have~~ closed ~~twelve restaurants, excluding one restaurant which we relocated within its existing market. We may incur lease charges in the future from additional closures of underperforming~~15 restaurants.

We currently anticipate that in 2015 we will close in ~~2014~~a total of 12 ~~restaurants, excluding one restaurant relocated within the same market area under a new franchise agreement, with an additional six~~20 to ~~eight restaurants scheduled to close at the beginning of 2015.~~25 restaurants. Our determination of whether to close restaurants in the future is subject to further evaluation and may change.

We may incur impairment and other lease charges in the future from additional closures of underperforming restaurants. However, we do not believe that the future impact on ~~our consolidated results of operations due to~~Adjusted EBITDA from restaurant closures will be material, although there can be no assurance in this regard.

Valuation of Deferred Income Tax Assets

We ~~establish a valuation allowance when it is necessary to reduce deferred tax assets to~~performed an ~~amount for which realization is likely. We have performed the required~~ assessment of positive and negative evidence, including our three-year cumulative loss position, regarding the realization of our deferred income tax ~~assets. We considered all available positive~~assets at December 28, 2014 and ~~negative evidence to determine whether, based on the weight of~~determined that ~~evidence,~~ a valuation allowance iswas needed for ~~some portion or~~ all of our net deferred income tax ~~assets. Judgment is used in considering the relative impact~~assets at December 28, 2014. As a result, we recorded a valuation reserve of negative and positive evidence. In arriving at these judgments, the weight given to the potential effect of negative and positive evidence is commensurate with the extent to which such evidence can be objectively verified.

In evaluating the objective evidence provided by historical results, we considered (among other things) the past three years of cumulative losses, projected reversals of deferred tax liabilities, recent improvements in operating results, the ability to carry-back net operating losses generated through December 30, 2012 against taxable income reported in prior years, and that the first year of expiration of our net operating loss carryforwards is 2033. We also considered subjective evidence related to the forecast of expected operating results for the years over the carryforward period. Additionally, the deferred tax liabilities we have considered in the assessment of the realization of deferred tax assets will reverse in the carryforward period and same jurisdiction. While our financial results for the ~~nine~~ months ended September 28, 2014 did not meet our previous projections, we have considered our financial results in the third quarter compared to the first and second quarters of 2014, as well as the accretive impact of closing underperforming restaurants and acquiring additional restaurants in 2014 within our forecast of their future performance. Based on the analysis of positive and negative evidence, we believed that there was enough positive evidence to overcome our cumulative loss position at September 28, 2014, and therefore no valuation allowance of our deferred tax assets of $17.7$24.3 million ~~was necessary. To date we have acquired 94 restaurants~~ in the fourth quarter of 2014. ~~Management recognizes that~~

For the ~~future performance of such restaurants, and the judgments associated with projected cash flows~~three months ended March 29, 2015 we increased our valuation reserve by $3.7 million for ~~the 2014 acquisitions are impactful to~~ our ~~analysis of positive and negative evidence, and our continued evaluation of the recoverability of~~incremental net deferred income tax ~~assets. In future periods, if~~assets in the ~~negative evidence outweighs~~period. Consequently, we recorded no benefit from income taxes in the ~~positive evidence, we would need to record a~~first quarter of 2015. At March 29, 2015, our valuation allowance ~~equal~~on all of our net deferred tax assets was $31.2 million, which included $3.5 million related to certain state net operating loss carryforwards.

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We believe that it is likely that our Federal net operating loss carryforwards, included in our deferred tax assets, will be utilized in the ~~full amount~~future as they do not begin to expire until 2033, although no assurance of this can be provided. However, the valuation allowance on our net deferred tax assets is required based on the relevant accounting literature which does not permit us to consider our projection of future taxable income as more persuasive evidence than our recent operating losses when assessing recoverability.

As of March 29, 2015, we had federal net operating loss carryforwards of approximately $40.8 million. As a result of the net deferred tax asset ~~balance at that time.~~valuation allowance established in 2014, we do not anticipate recognizing any income tax expense or benefit in 2015.

We will continue to monitor and evaluate the positive and negative evidence considered in arriving at the above conclusion, in order to assess whether such conclusion remains appropriate in future periods.

Health Care Reform

The Patient Protection and Affordable Care Act (the “Act”) ~~requires~~required businesses employing fifty or more full-time equivalent employees to offer health care benefits to those full-time employees beginning in January 2015, or be subject to an annual penalty. Those benefits must be provided under a health care plan which provides a certain minimum scope of health care services. The Act also limits the portion of the cost of the benefits which we can require employees to pay.

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We are continuing to assess the financial impact of the Act including the provision beginning in 2015 to offer health insurance to our hourly employees who work an average of 30 hours or more per week. Based on our ~~analyses to date and~~initial enrollment experience in 2015, approximately 10% of our ~~current activities addressing aspects of this provision operationally, we~~approximately 1,600 currently eligible hourly employees have opted for coverage under our medical plan. We estimate that our additional cost for ~~the~~ health care coverage for our ~~qualifying~~ hourly employees, ~~would not exceed $3.0~~from the eligibility provisions of the Act, will range between $0.4 million on an annual basis if all our eligible hourly employees elect coverage. Given the estimated annual premium cost our eligible hourly employees would incur in comparison to the annual financial penalty they would pay if they do not elect our health care coverage, we currently estimate our additional annual health care costs could range fromand $0.5 million ~~to $1.0 million due solely to this provision; however there can be no assurance~~ in ~~this regard. For~~2015. In addition for 2015, ~~due to~~we anticipate additional fee assessments under the Act ~~we expect to incur additional health care premiums~~ of ~~$0.8~~$0.9 million associated with our current health care ~~coverage of our employees.~~coverage.

Results of Operations

Three Months Ended ~~September 28, 2014~~March 29, 2015 Compared to Three Months Ended ~~September 29, 2013~~March 30, 2014

The following table sets forth, for the three months ended ~~September 28,~~March 29, 2015 and March 30, 2014, ~~and~~ ~~September 29, 2013~~, selected operating results as a percentage of total restaurant sales:


	Three Months Ended				Three Months Ended
	September 28, 2014		September 29, 2013		March 29, 2015		March 30, 2014
Costs and expenses (all restaurants):
Cost of sales	30.7	%	30.4	%	29.4	%	28.6	%
Restaurant wages and related expenses	31.2	%	31.1	%	32.8	%	33.6	%
Restaurant rent expense	6.8	%	7.0	%	7.5	%	7.6	%
Other restaurant operating expenses	16.2	%	16.0	%	16.8	%	17.2	%
Advertising expense	3.8	%	4.4	%	3.8	%	4.3	%
General and administrative	5.6	%	5.2	%	6.0	%	6.8	%

Since the beginning of ~~the~~ ~~third~~ ~~quarter of~~ ~~2013~~,2014, we acquired 30123 restaurants from other franchisees in five separate acquisitions and opened ~~three~~one new ~~restaurants, including~~ ~~two~~ ~~restaurants~~restaurant which was relocated within ~~the same~~its market ~~areas under new franchise agreements.~~area. During the same period we closed ~~sixteen~~28 restaurants, excluding the relocated ~~restaurants.~~restaurant.

Restaurant Sales. Total restaurant sales in the ~~third~~first quarter of ~~2014~~2015 increased ~~6.8%~~ 27.5% to ~~$179.8~~$193.2 million from ~~$168.3~~$151.5 million in the ~~third~~first quarter of ~~2013~~.2014 which included $32.5 million of sales from the 2014 acquired restaurants. Comparable restaurant sales in the ~~third~~first quarter of ~~2014~~2015 increased~~3.3%~~ 8.4% due to an increase in ~~average check of 8.0%, which was partially offset by a decrease in~~ customer traffic of ~~4.7%. These changes were caused~~6.3% driven in part ~~by fewer low price~~from effective promotions inand favorable weather comparisons relative to the ~~third~~first quarter of 2014 ~~compared~~in certain of our markets. Average check increased 2.1% due to ~~the prior~~ year ~~quarter. The effect of~~over year menu price increases in the ~~third~~first quarter of ~~2014~~ ~~was~~2015 of approximately ~~2.0%~~2.3%. Comparable restaurant sales increased ~~2.7%~~6.8% at our legacy restaurants and increased ~~4.0%~~10.5% at our 2012 acquired restaurants. ~~Sales from the restaurants we acquired in 2014 were $7.8 million in the~~ ~~third~~ ~~quarter~~

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Operating Costs and Expenses (percentages stated as a percentage of total restaurant sales). Cost of sales increased to ~~30.7%~~29.4% in the ~~third~~first quarter of ~~2014~~2015 from ~~30.4%~~28.6% in the ~~third~~first quarter of ~~2013~~2014 due primarily to ~~higher~~an 11% increase in beef commodity costs ~~(2.0%~~(0.8%) and increased promotional discounting (0.8%) partially offset by ~~decreases in other commodity costs (0.3%),~~the effect of menu price increases ~~(0.8%), lower discounts and promotions (0.4%)~~ and improvements in restaurant-level food and cash controls at our legacy and 2012 acquired ~~restaurants (0.3%).~~restaurants.

Restaurant wages and related expenses ~~increased slightly~~decreased to ~~31.2%~~32.8% in the ~~third~~first quarter of ~~2014~~2015 from ~~31.1%~~33.6% in the ~~third~~first quarter of ~~2013~~2014 due primarily to leveraging fixed labor costs on higher ~~restaurant-level performance bonuses (0.2%~~sales volumes (0.6%). and lower workers compensation claims.

Other restaurant operating expenses ~~increased~~decreased to ~~16.2%~~16.8% in the ~~third~~first quarter of ~~2014~~2015 from ~~16.0%~~17.2% in the ~~third~~first quarter of ~~2013~~2014 due primarily to ~~higher~~lower utility costs (0.2%), lower general liability ~~insurance~~ claims ~~(0.2%~~(0.1%). and the effect of higher sales volumes on fixed operating costs.

Advertising expense decreased to 3.8% in the ~~third~~first quarter of ~~2014~~2015 from ~~4.4%~~4.3% in the ~~third~~first quarter of ~~2013~~2014 due ~~primarily~~ to reduced spending for additional local advertising in many of our markets.

Restaurant rent expense decreased to ~~6.8%~~7.5% in the ~~third~~first quarter of ~~2014~~2015 from ~~7.0%~~7.6% in the ~~third~~first quarter of ~~2013~~2014 due primarily to the closure of ~~sixteen~~28 restaurants with ~~below average~~lower sales volumes since the beginning of the ~~third~~first quarter of ~~2013~~2014 and the effect of ~~comparable restaurant~~higher sales ~~increases~~volumes in the ~~third~~first quarter of ~~2014~~2015 on fixed ~~rentals.~~rental costs.

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Restaurant-Level EBITDA. As a result of the factors above and the acquisition of 123 restaurants in 2014, Restaurant-Level EBITDA increased ~~10.2%~~42.9%, or ~~$1.9~~$5.6 million, to ~~$20.5~~$18.8 million in the ~~third~~first quarter of ~~2014. Restaurant-Level EBITDA for our 2012 acquired restaurants was $6.0 million in the third quarter of 2014 compared to $4.3 million in the third quarter of 2013.~~2015. For a reconciliation between Restaurant-Level EBITDA and ~~income (loss)~~loss from operations see page 24.23.


	Three Months Ended								Three Months Ended
	September 28, 2014		% ⁽¹⁾		September 29, 2013		% ⁽¹⁾		March 29, 2015		% ⁽¹⁾		March 30, 2014		% ⁽¹⁾
Restaurant Sales:
Legacy restaurants	$	96,861			$	94,307			$	88,174			$	83,912
2012 acquired restaurants	75,180				74,005				72,456				67,541
2014 acquired restaurants	7,781				—				32,540				—
Total	$	179,822			$	168,312			$	193,170			$	151,453

Restaurant-Level Restaurant EBITDA:
Restaurant-Level EBITDA:
Legacy restaurants	$	13,630	14.1	%	$	14,295	15.2	%	$	10,176	11.5	%	$	9,287	11.1	%
2012 acquired restaurants	6,014		8.0	%	4,269		5.8	%	6,765		9.3	%	3,874		5.7	%
2014 acquired restaurants	808		10.4	%	—				1,868		5.7	%	—
Total	$	20,452	11.4	%	$	18,564	11.0	%	$	18,809	9.7	%	$	13,161	8.7	%

(1) Restaurant-Level EBITDA margin is calculated as a percentage of restaurant sales for ~~the~~each respective group of restaurants.

Restaurant-Level EBITDA margin ~~decreased 1.1% at~~increased for our legacy restaurants due primarily to a comparable restaurant sales increase in the first quarter of 2015 of 6.8% partially offset by higher beef ~~costs and higher restaurant-level bonus accruals. Restaurant-level~~costs. Restaurant-Level EBITDA margin increased ~~2.2% at~~3.6% for our 2012 acquired restaurants due to a comparable restaurant sales increase of 10.5% in the first quarter of 2015 and improvements in food and cash controls, ~~the closure of ten underperforming restaurants since the beginning of the third quarter of 2013 and the effect of comparable sales increases on fixed operating~~which helped mitigate higher beef costs. Cost of sales, as a percentage of restaurant sales, ~~declined 0.2%~~was 29.3% in the first quarter of 2015 at ~~our acquired 2012 restaurants, compared to an increase of 0.7% at~~both our legacy and 2012 acquired restaurants. In addition we have closed 19 underperforming 2012 acquired restaurants since the beginning of the first quarter of 2014. Restaurant-Level EBITDA margin for our 2014 acquired restaurants was lower in the first quarter of 2015 than our other restaurants due primarily to ~~the improvement in food and cash controls. However, cost~~lower average restaurant sales volumes, higher costs of sales, as a percentage of restaurant sales, atof 30.2% and higher repairs and maintenance expenses related to deferred maintenance prior to our ~~2012 acquired restaurants was 31% and 0.6% higher than that at our legacy restaurants in the third quarter of 2014.~~ownership.

General and Administrative Expenses. General and administrative expenses increased~~$1.3~~ $1.3 million in the ~~third~~first quarter of ~~2014~~2015 to ~~$10.0~~$11.6 million, ~~and,~~ however, as a percentage of total restaurant sales, ~~increased~~decreased to ~~5.6%~~6.0% compared to~~5.2%~~

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6.8% in the ~~third~~first quarter of ~~2013~~2014. The increase in total general and administrative expenses was due primarily to ~~higher legal~~additional district manager salaries, travel costs and ~~professional fees of $0.5 million and higher field management salaries,~~restaurant manager training ~~and travel of $0.4 million. General and administrative expenses in the third quarter of 2014 include $0.4 million of acquisition and integration~~ costs related to the 2014 ~~acquisitions. General~~acquisitions partially offset by lower legal and ~~administrative expenses also increased due to $0.6 million in payments received by us from Fiesta Restaurant Group, Inc. ("Fiesta") in the~~ ~~third~~ ~~quarter of 2013 for transitional services. These services ended in the fourth quarter of 2013.~~professional fees and an insurance gain.

Adjusted EBITDA. As a result of the factors above, Adjusted EBITDA increased ~~9.9%~~ to ~~$11.1~~$7.7 million in the ~~third~~first quarter of ~~2014~~2015 from ~~$10.1~~$3.3 million in the ~~third~~first quarter of ~~2013~~.2014. For a reconciliation between net loss and EBITDA and Adjusted EBITDA see page 24.23.

Depreciation and Amortization Expense. Depreciation and amortization expense increased to ~~$9.3~~$10.0 million in the ~~third~~first quarter of ~~2014~~2015 from ~~$8.5~~$8.8 million in the ~~third~~first quarter of ~~2013~~2014 due primarily to our remodeling initiatives in 2014 and ~~2013.~~2015 and the 2014 acquisitions.

Impairment and Other Lease Charges. Impairment and other lease charges were ~~$0.8~~$1.6 million in the ~~third~~first quarter of ~~2014~~2015 and were comprised of other lease charges of ~~$0.3~~$1.2 million associated with the closure of ~~two~~eight restaurants in the ~~third~~first quarter of ~~2014~~2015 and asset impairment charges of ~~$0.4~~$0.5 million, which included $0.3 million of capital expenditures at previously impaired restaurants.

Interest Expense. Interest expense was ~~$4.7~~$4.8 million in the ~~third~~first quarter of ~~both~~ ~~2014~~ ~~and~~ ~~2013~~.2015 compared to $4.7 million in the first quarter of 2014. The weighted average interest rate on our long-term debt, excluding lease financing obligations, was 11.25% in the ~~third~~first quarter of ~~both~~ ~~2014~~2015 and ~~2013~~.11.20% in the first quarter of 2014.

Benefit for Income Taxes. Due to the valuation allowance on all of our deferred income tax assets discussed above, we did not record any benefit for income taxes in the first quarter of 2015. The benefit for income taxes for the ~~third~~first quarter of 2014 was derived using an estimated effective annual income tax rate for 2014 of ~~37.5%, which excluded any discrete~~33.9% as we recorded a valuation allowance on our all of our deferred income tax adjustments. Our estimated effective tax rate for 2014 does not consider the Work Opportunity Tax Credit which expired at the end of 2013 for any qualified employees hired after that date. This credit for qualified employees hired in 2014 will be reflected in our estimated effective tax rateassets in the ~~period if and~~

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~~when re-enacted into law. Discrete tax adjustments increased the benefit for income taxes in the~~ ~~third~~fourth quarter of ~~2014~~ ~~by $0.5 million, which included $0.5 million in employment tax credits relating to periods prior to the tax credit's expiration.~~

~~The benefit for income taxes for the~~ ~~third~~ ~~quarter of~~ ~~2013~~ ~~was derived using an estimated effective annual income tax rate for~~ ~~2013~~ ~~of 39.9%, which excluded discrete tax adjustments. Discrete tax adjustments increased the benefit for income taxes in the~~ ~~third~~ ~~quarter of~~ ~~2013~~ ~~by $0.1 million.~~2014.

Net Loss. As a result of the above, net loss for the ~~third~~ ~~quarter of~~ ~~2014~~ ~~was~~ ~~$1.7 million, or~~ ~~$0.05~~ ~~per diluted share, compared to a net loss in the~~ ~~third~~ ~~quarter of~~ ~~2013~~ of ~~$2.8 million, or~~ ~~$0.12~~ ~~per diluted share.~~

~~Nine Months Ended September 28, 2014 Compared to Nine Months Ended September 29, 2013~~

~~The following table sets forth, for the~~ ~~nine months endedSeptember 28, 2014~~ ~~and~~ ~~September 29, 2013, selected operating results as a percentage of total restaurant sales:~~

Nine Months Ended
September 28, 2014 September 29, 2013
Costs and expenses (all restaurants):
Cost of sales 29.7 % 30.6 %
Restaurant wages and related expenses 32.0 % 31.5 %
Restaurant rent expense 7.1 % 7.1 %
Other restaurant operating expenses 16.5 % 16.2 %
Advertising expense 4.1 % 4.5 %
General and administrative 5.8 % 5.5 %

~~Since the beginning of~~ ~~2013~~ we acquired 30 restaurants and opened three new restaurants, including two restaurants relocated within the same market areas under new franchise agreements. During the same period we closed 22 restaurants, excluding the relocated restaurants.

~~Restaurant Sales.~~ ~~Restaurant sales in the first nine months of~~ ~~2014~~ ~~increased 0.4% to $499.9 million from $498.0 million in the first nine months of~~ ~~2013. Comparable restaurant sales in the first nine months of~~ ~~2014~~ ~~decreased 0.4% due to lower customer traffic of 5.8%, which was substantially offset by an increase in average check of 5.4%. The effect of menu price increases in the first nine months of~~ ~~2014~~ ~~was approximately 2.1%.~~

~~Comparable restaurant sales for our legacy restaurants decreased 0.1% in the first nine months of~~ ~~2014. Comparable restaurant sales at our 2012 acquired restaurants decreased 0.7%. Sales from the restaurants we have acquired in 2014 were $8.6 million in the first nine months of~~ ~~2014~~.

~~Operating Costs and Expenses (percentages stated as a percentage of total restaurant sales).~~ ~~Cost of sales decreased to 29.7% in the first nine months of~~ ~~2014~~ ~~from 30.6% in the first nine months of~~ ~~2013~~ due primarily to the effect of menu price increases (0.8%), improvement in restaurant-level food and cash controls at our 2012 acquired restaurants (0.4%) and higher vendor rebates (0.2%), substantially offset by higher beef commodity costs (1.1%).

~~Restaurant wages and related expenses increased to 32.0% in the first nine months of~~ ~~2014~~ ~~from 31.5% in the first nine months of~~ ~~2013~~ ~~due to higher medical insurance claims (0.2%) and the effect of labor rate increases on slightly negative comparable restaurant sales.~~

~~Other restaurant operating expenses increased to 16.5% in the first nine months of~~ ~~2014~~ ~~from 16.2% in the first nine months of~~ ~~2013~~ ~~due primarily to higher general liability insurance claims (0.2%) and higher utility costs (0.1%).~~

~~Advertising expense decreased to 4.1% in the first nine months of~~ ~~2014~~ ~~from 4.5% in the first nine months of~~ ~~2013~~ ~~due primarily to lower spending for additional local advertising in certain markets. For all of~~ ~~2014, we anticipate advertising expense for all restaurants to range between 4.1% and 4.2% of restaurant sales.~~

~~Restaurant rent expense was 7.1% in both the first nine months of~~ ~~2014~~ ~~and~~ ~~2013~~ ~~due to essentially flat restaurant sales.~~

~~Restaurant-Level EBITDA.~~ ~~As a result of the factorsabove, Restaurant-Level EBITDA increased 6.7%, or $3.3 million, to $53.3 million in the first nine months of~~ ~~2014~~ ~~compared to $50.0 million in the first nine months of~~ ~~2013. For a reconciliation between Restaurant-Level EBITDA and income (loss) from operations see page~~ 24.

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Nine Months Ended
September 28, 2014
%⁽¹⁾
September 29, 2013
%⁽¹⁾
Restaurant Sales:
Legacy restaurants $ 274,394
$ 275,383

2012 acquired restaurants 216,880
222,586

2014 acquired restaurants 8,584
—

Total $ 499,858
$ 497,969

Restaurant-Level EBITDA Margin:
Legacy restaurants $ 36,356
13.2 % $ 38,692
14.1 %
2012 acquired restaurants 16,136
7.4 % 11,315
5.1 %
2014 acquired restaurants 842
9.8 % —
— %
Total $ 53,334
10.7 % $ 50,007
10.0 %

~~(1) Restaurant-Level EBITDA margin is calculated as a percentage of restaurant sales for the respective group of restaurants.~~

Restaurant-Level EBITDA margin decreased 0.9% at our legacy restaurants due primarily to the effect of higher labor costs on slightly negative comparable restaurant sales and higher medical insurance claims. Restaurant-level EBITDA margin increased 2.3% at our 2012 acquired restaurants due to similar factors previously discussed for the third quarter plus lower spending for additional local advertising in certain markets. Fourteen underperforming restaurants acquired in 2012 have closed since the beginning of 2013.

~~General and Administrative Expenses.~~ ~~General and administrative expenses increased $1.6 million in the first nine months of~~ ~~2014~~ to $28.9 million and, as a percentage of total restaurant sales, increased to 5.8% from 5.5%. The increase in general and administrative expenses was due primarily to $3.0 million in payments received by us from Fiesta in the first nine months of 2013 for transitional services which ended in the fourth quarter of 2013 and higher legal and professional fees of $0.8 million. General and administrative expenses include $0.7 million in acquisition and integration costs related to the 2014 acquisitions. This was substantially offset by lower administrative bonus accruals of $1.7 million.

~~Adjusted EBITDA.~~ ~~As a result of the factorsabove Adjusted EBITDA increased 8.9% to $26.0 million in the first nine months of~~ ~~2014~~ ~~from $23.8 million in the first nine months of~~ ~~2013. For a reconciliation between net loss and EBITDA and Adjusted EBITDA see page 24.~~

~~Depreciation and Amortization.~~ ~~Depreciation and amortization expense increased to $27.1 million in the first nine months of~~ ~~2014~~ ~~from $25.0 million in the first nine months of~~ ~~2013~~ ~~due primarily to our restaurant remodeling initiatives in~~ ~~2014~~ ~~and~~ ~~2013~~.

~~Impairment and Other Lease Charges.~~ ~~Impairment and other lease charges were $1.8 million in the first nine months of~~ ~~2014~~ and were comprised of $0.7 million of estimated future rent payments and other lease related charges due to the closure of three underperforming restaurants, $0.5 million of initial impairment charges associated with five underperforming restaurants and $0.6 million of impairment charges associated with capital expenditures at previously impaired restaurants.

~~Interest Expense.~~ ~~Total interest expense was $14.1 million in both the first nine months of~~ ~~2014~~ ~~and the first nine months of~~ ~~2013. The weighted average interest rate on our long-term debt, excluding lease financing obligations, decreased to 11.23% in the first nine months of~~ ~~2014~~ ~~compared to 11.25% in the first nine months of~~ ~~2013~~.

~~Benefit for Income Taxes.~~ ~~The benefit for income taxes for the first nine months of~~ ~~2014~~ ~~was derived using an estimated effective annual income tax rate for all of~~ ~~2014~~ ~~of 37.5%, which excluded any discrete tax adjustments. Discrete tax adjustments increased the benefit for income taxes in the first nine months of~~ ~~2014~~ ~~by $0.6 million, which included $0.5 million in employment tax credits relating to periods prior to the expiration of the Work Opportunity Tax credit at the end of 2013.~~

~~The benefit for income taxes for first nine months of~~ ~~2013~~ ~~was derived using an estimated effective annual income tax rate for~~ ~~2013~~ of 39.9%, which excluded discrete tax adjustments. In January 2013, the United States Congress authorized, and the President signed into law, certain federal tax credits that were reflected in our Federal tax return for 2012. However, since the law was enacted in 2013, the financial statement benefit of such credits totaling $1.0 million was recorded in the first quarter of ~~2013~~

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and is included in the benefit for income taxes for the first nine months of 2013. We also had other discrete tax adjustments which decreased the benefit for income taxes by $0.3 million in the first nine months of ~~2013~~.

~~Net Loss.~~ ~~As a result of the foregoing, net loss for the first nine months of~~ ~~2014~~2015 was ~~$11.1~~$9.3 million, or ~~$0.37~~$0.27 per diluted share, compared to a net loss in the first ~~nine months~~quarter of ~~2013~~2014 of ~~$11.5~~$7.4 million, or ~~$0.50~~$0.32 per diluted share.

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Reconciliations of EBITDA and Adjusted EBITDA to net loss and Restaurant-Level EBITDA to ~~income (loss)~~loss from operations are as follows:


	Three Months Ended						Nine Months Ended						Three Months Ended
Reconciliation of EBITDA and Adjusted EBITDA:	September 28, 2014			September 29, 2013			September 28, 2014			September 29, 2013			March 29, 2015			March 30, 2014
Net loss	$	(1,721	)	$	(2,762	)	$	(11,082	)	$	(11,457	)	$	(9,276	)	$	(7,429	)
Benefit for income taxes	(2,632		)	(1,737		)	(7,555		)	(8,720		)	—			(3,758		)
Interest expense	4,683			4,708			14,080			14,130			4,814			4,703
Depreciation and amortization	9,318			8,536			27,121			24,990			10,005			8,758
EBITDA	9,648			8,745			22,564			18,943			5,543			2,274
Impairment and other lease charges	773			1,079			1,822			3,907			1,630			620
Acquisition and integration costs (1)	412			—			686			—			211			122
EEOC Litigation and settlement costs	—			—			—			85
Stock-based compensation expense	296			302			883			899			341			296
Adjusted EBITDA	$	11,129		$	10,126		$	25,955		$	23,834		$	7,725		$	3,312


Reconciliation of Restaurant-Level EBITDA:
Restaurant-Level EBITDA	$	20,452	$	18,564	$	53,334		$	50,007		$	18,809		$	13,161
Less:
General and administrative expenses	10,031		8,740		28,923			27,342			11,596			10,267
Depreciation and amortization	9,318		8,536		27,121			24,990			10,005			8,758
Impairment and other lease charges	773		1,079		1,822			3,907			1,630			620
Other expense (income)	—		—		25			(185		)	40			—
Income (loss) from operations	$	330	$	209	$	(4,557	)	$	(6,047	)
Loss from operations											$	(4,462	)	$	(6,484	)


(1)	Acquisition and integration costs for the periods presented include primarily legal and professional fees ~~salaries, training and travel expenses~~ incurred in connection with the 2014 acquisitions.

Liquidity and Capital Resources

We do not have significant receivables or inventory and receive trade credit based upon negotiated terms in purchasing food products and other supplies. We are able to operate with a substantial working capital deficit because:

restaurant operations are primarily conducted on a cash basis;

rapid turnover results in a limited investment in inventories; and

cash from sales is usually received before related liabilities for food, supplies and payroll ~~become due.~~are paid.

On April ~~30, 2014,~~29, 2015, we ~~completed~~issued $200 million of New Notes and used a ~~Public Offering~~portion of ~~10.0 million shares~~the proceeds to repurchase all of ~~our common stock at a price of $6.20 per share. We also issued an additional 1.5 million shares of our common stock~~the Notes tendered pursuant to a cash tender offer and the ~~underwriters’ exercise~~related consent solicitation (or through a redemption, repurchase or retirement of ~~their option to purchase additional shares at the same terms and conditions as offered~~any such Notes that were not purchased in the ~~Public Offering, for a total share issuance of 11.5 million shares. All shares were issued~~tender offer) and ~~sold by us~~to pay related fees and expenses. We will use the net proceeds ~~were~~from the sale of the New Notes of approximately ~~$67.3~~$35 million for working capital and general corporate purposes, including potential acquisitions and capital expenditures to remodel restaurants.

On April 29, 2015, we entered into an amendment to our senior credit facility to increase aggregate revolving credit borrowings by $10 million to $30.0 million (including an increase of $5.0 million to $20.0 million available for letters of credit). The amended senior credit facility has a five-year maturity, permits potential incremental increases in revolving credit borrowings of up to $25.0 million, subject to approval by the ~~aggregate after deducting underwriting discounts~~lenders, amends certain financial ratios which we must maintain and ~~commissions and offering expenses.~~reduces the interest rate for revolving credit borrowings to, at our option, (i) the alternate base rate plus the applicable margin of 2.0% to 2.75% based on our total lease adjusted leverage ratio, or (ii) the LIBOR rate plus the applicable margin of 3.0% to 3.75% based on our total lease adjusted leverage ratio (all as defined under the amended senior credit facility).

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Interest payments under our debt obligations, capital expenditures, including our commitment to BKC to remodel restaurants in 2015, payments of royalties and advertising to BKC and payments related to our lease obligations represent significant liquidity requirements for us as well as any discretionary expenditures for the acquisition of additional Burger King® restaurants. We believe ~~net proceeds~~that cash generated from the ~~issuance~~sale of ~~our common stock in~~ the ~~Public Offering,~~New Notes on April 29, 2015, cash generated from our operations and availability of revolving credit borrowings under our senior credit facility, as amended, will provide sufficient cash availability to cover our anticipated working capital needs, capital expenditures and debt service requirements for the next twelve months.

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Operating Activities. Net cash provided from operating activities in the first ~~nine~~three months of ~~2014~~ ~~was $10.9~~2015 increased to $14.5 million ~~a decrease of~~ ~~$5.3 million~~from ~~cash provided from operating activities of $16.2~~$0.4 million in the first ~~nine~~three months of ~~2013~~.2014. The ~~decrease~~increase was due primarily to ~~a greater~~an increase ~~in deferred income tax assets of $3.3 million in~~ ~~2014~~ ~~and~~ ~~a decrease~~ in cash from changes in the components of net working capital of ~~$2.3~~$9.8 million. and an increase in Adjusted EBITDA of $4.4 million.

Investing Activities. Net cash used for investing activities in the first ~~nine~~three months of ~~2014~~2015 and ~~2013~~2014 was $~~42.5~~$11.0 million and $~~40.4~~$8.8 million,, respectively.

~~In the first~~ ~~nine~~ ~~months of~~ ~~2014~~ ~~we acquired 29 Burger King® restaurants for an aggregate cash purchase price of $13.0 million. On~~ ~~April 30, 2014, we exercised our ROFR and acquired~~ ~~four~~ Burger King® restaurants in Fort Wayne, Indiana for a cash purchase price of $0.7 million. In the third quarter on June 30, 2014, we exercised our ROFR and purchased four Burger King® restaurants in the Pittsburgh, Pennsylvania market for a cash purchase price of approximately $3.8 million including one fee-owned property. On July 22, 2014, we completed the acquisition of 21 Burger King® restaurants located in the Rochester, NY market and in the Southern Tier region of Western New York State in a negotiated transaction for a cash purchase price of approximately $8.5 million.

Subsequent to the end of the third quarter of 2014, on October 8, 2014, we exercised our ROFR and purchased 30 Burger King® restaurants in or around the Wilmington, North Carolina and Greenville, North Carolina markets for a cash purchase price of approximately $20.5 million, which included 12 fee-owned properties. We are currently marketing eleven of the fee-owned properties acquired in the 2014 acquisitions in sale-leaseback transactions. Also in the fourth quarter of 2014, on November 4, 2014, we purchased 64 Burger King® restaurants in or around the Nashville, TN, Springfield, IL, Terre Haute, IN, and Evansville, IN markets for a cash purchase price of ~~$18.0 million~~ ~~excluding inventory.~~

Capital expenditures are a large component of our investing activities and include: (1) new restaurant development, which may include the purchase of real estate; (2) restaurant remodeling, which includes the renovation or rebuilding of the interior and exterior of our existing restaurants, including expenditures associated with our commitment to BKC to remodel restaurants to the 20/20 image and franchise agreement renewals; (3) other restaurant capital expenditures, which include capital maintenance expenditures for the ongoing reinvestment and enhancement of our restaurants including expenditures, from time to time, to support BKC’s ~~ongoing menu enhancement~~ initiatives; and (4) corporate and restaurant information systems, including expenditures for our point-of-sale ~~systems~~software for restaurants that we acquire.

The following table sets forth our capital expenditures for the periods presented (in thousands):


Nine Months Ended September 28, 2014
Three Months Ended March 29, 2015
New restaurant development	$	1,661	$	18
Restaurant remodeling	23,345		8,792
Other restaurant capital expenditures ~~(1)~~	4,533		2,552
Corporate and restaurant information systems	3,173		704
Total capital expenditures	$	32,712	$	12,066
Number of new restaurant openings ~~(2)~~	1		—
Nine Months Ended September 29, 2013
Three Months Ended March 30, 2014
New restaurant development	$	582	$	1,408
Restaurant remodeling	31,574		4,020
Other restaurant capital expenditures ~~(1)~~	5,724		1,283
Corporate and restaurant information systems	2,478		254
Total capital expenditures	$	40,358	$	6,965
Number of new restaurant openings(1)	—		1

_____________


1)	~~Excludes restaurant repair and maintenance expenses included in other restaurant operating expenses in our consolidated financial statements. For the~~ ~~nine months endedSeptember 28, 2014~~ ~~and~~ ~~September 29, 2013, total restaurant repair and maintenance expenses were approximately $13.0 million and $13.2 million, respectively.~~


2)	~~Represents a restaurant which was relocated within the same market area under a new franchise agreement.~~

In (1)~~2014, we anticipate that total capital expenditures will range from $55 million to $58 million, although~~Represents a restaurant which was relocated within the ~~actual amount~~same market area under a new franchise agreement.

Investing activities in the first three months of ~~capital expenditures may differ from these estimates. Capital expenditures in~~ ~~2014~~ ~~are expected to include approximately $38 million to $40~~2015 also included $0.7 million for ~~remodeling~~the purchase of an existing restaurant property that was sold in a ~~total~~sale-leaseback transaction in the first three months of ~~100~~2015 and proceeds from sale-leaseback transactions of two restaurant properties of $1.8 million.

Financing Activities. Net cash used in financing activities in the first three months of 2015 was $0.5 million due primarily to ~~110 restaurants~~principal payments on capital leases. Net cash provided by financing activities in the first three months of 2014 was $1.5 million which primarily related to revolving credit borrowings under our senior credit facility.

8% Senior Secured Second Lien Notes. ~~2014~~ ~~to the BKC 20/20 image standard, $4 million to~~The New Notes mature on May 1, 2022. Interest is payable semi-annually on May 1 and November 1 commencing November 1, 2015. The New Notes are guaranteed by our material subsidiaries

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scrape and rebuild three restaurants, capital restaurant maintenance expenditures of approximately $6.0 million and $5.0 million to $6.0 million of expenditures for corporate and restaurant information systems.

~~Investing activities in~~ ~~2014~~ included $3.4 million for purchases of three existing restaurant properties that were sold in sale-leaseback transactions in 2014 and proceeds from sale-leaseback transactions of five restaurant properties of ~~$6.6 million~~. The net proceeds from a sale-leaseback transaction in the first quarter was used to reduce outstanding borrowings under our senior credit facility and the net proceeds from sale-leaseback transactions in the second and third quarters were used to fund ongoing restaurant remodeling initiatives.

~~Financing Activities.~~ ~~Net cash~~ ~~provided by~~ ~~financing activities in the first~~ ~~nine~~ ~~months of~~ ~~2014~~ ~~was~~ ~~$66.6 million, due primarily from a public offering of our common stock completed in the second quarter which generated net cash proceeds of $67.3 million, net of related expenses. Net cash~~ ~~used in~~ ~~financing activities in the first~~ ~~nine~~ ~~months of~~ ~~2013~~ ~~was~~ ~~$0.8 million~~ ~~which was related to principal payments on capital leases.~~

~~Senior Secured Second Lien Notes.~~ On May 30, 2012, we issued $150.0 million of the Notes pursuant to an indenture dated as of May 30, 2012 governing such Notes. The Notes mature and are payable on May 15, 2018. Interest is payable semi-annually on May 15 and November 15. The Notes are guaranteed by our material subsidiaries and are secured by second-priority liens on substantially all of ~~ours~~our and our subsidiaries' assets (including a pledge of all of the capital stock and equity interests of our subsidiaries).

The New Notes are redeemable at our option in whole or in part at any time after May ~~15, 2015~~1, 2018 at a price of ~~105.625%~~104% of the principal amount plus accrued and unpaid interest, if any, if redeemed before May ~~15, 2016, 102.813%~~1, 2019, 102% of the principal amount plus accrued and unpaid interest, if any, if redeemed after May ~~15, 2016~~1, 2019 but before May ~~15, 2017~~1, 2020 and 100% of the principal amount plus accrued and unpaid interest, if any, if redeemed after May ~~15, 2017.~~1, 2020. Prior to May ~~15, 2015,~~1, 2018, we may redeem some or all of the New Notes at a redemption price of 100% of the principal amount of each New Note plus accrued and unpaid interest, if any, and a make-whole premium. In addition, the indenture governing the New Notes also provides that we may redeem up to 35% of the New Notes using the proceeds of certain equity offerings completed before May ~~15, 2015.~~1, 2018.

The New Notes are jointly and severally guaranteed, unconditionally and in full by our material subsidiaries which are directly or indirectly 100% owned by us. Separate condensed consolidating information is not included because Carrols Restaurant Group is a holding company that has no independent assets or operations. There are no significant restrictions on our ability or any of the guarantor subsidiaries' ability to obtain funds from its respective subsidiaries. All consolidated amounts in our financial statements are representative of the combined guarantors.

The indenture governing the New Notes includes certain covenants, including limitations and restrictions on our and our subsidiaries who are guarantors under such indenture to, among other things: incur indebtedness or issue preferred stock; incur liens; pay dividends or make distributions in respect of capital stock or make certain other restricted payments or investments; sell assets; agree to payment restrictions affecting certain subsidiaries; enter into transaction with affiliates; or merge, consolidate or sell substantially all of our assets.

The indenture governing the New Notes and the security agreement provide that any capital stock and equity interests of any of our subsidiaries will be excluded from the collateral to the extent that the par value, book value or market value of such capital stock or equity interests exceeds 20% of the aggregate principal amount of the New Notes then outstanding.

The indenture governing the New Notes contains customary default provisions, including without limitation, a cross default provision pursuant to which it is an event of default under the New Notes and the indenture governing the New Notes if there is a default under any of our indebtedness having an outstanding principal amount of ~~$15.0~~$20.0 million or more which results in the acceleration of such indebtedness prior to its stated maturity or is caused by a failure to pay principal when due. ~~We were in compliance as of~~ ~~September 28, 2014~~ ~~with the restrictive covenants of the indenture governing the Notes.~~

Senior Credit Facility. On May 30, 2012, we entered into a senior credit facility, which provides for aggregate revolving credit borrowings of up to $20.0 million (including $15.0 million available for letters of credit) maturing on May 30, 2017. The senior credit facility also provides for potential incremental borrowing increases of up to $25.0 million, in the aggregate.

Under the senior credit facility (all terms not otherwise defined herein are defined in our senior credit facility), we have deposited $20.0 million in an account with the Administrative Agent as collateral for the senior credit facility until the date on which our Adjusted Leverage Ratio is less than 6.00x for two consecutive fiscal quarters (the “Cash Collateral Release Date"). This amount is classified as restricted cash on our consolidated balance sheet as of ~~September 28, 2014~~.

~~Prior to the Cash Collateral Release Date, revolving credit borrowings under the senior credit facility bear interest at a rate per annum, at our option, of:~~

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~~(i) the Alternate Base Rate plus the applicable margin of 0.75% or~~

~~(ii) the LIBOR Rate plus the applicable margin of 1.75%.~~

~~Following the Cash Collateral Release Date, borrowings under the senior credit facility will bear interest at a rate per annum, at our option, of~~

~~(i) the Alternate Base Rate plus the applicable margin of 2.50% to 3.25% based on our Adjusted Leverage Ratio, or~~

~~(ii) the LIBOR Rate plus the applicable margin of 3.50% to 4.25% based on our Adjusted Leverage Ratio.~~

Our obligations under the senior credit facility, as amended, are guaranteed by our subsidiaries and are secured by first priority liens on substantially all of our assets and our subsidiaries, including a pledge of all of the capital stock and equity interests of the subsidiaries.

Under the senior credit facility, we will be required to make mandatory prepayments of borrowings in the event of dispositions of assets, debt issuances and insurance and condemnation proceeds (all subject to certain exceptions). The senior credit facility contains certain covenants, including without limitation, those limiting our and our subsidiaries' ability to, among other things, incur indebtedness, incur liens, sell or acquire assets or businesses, change the character of its business in all material respects, engage in transactions with related parties, make certain investments, make certain restricted payments or pay dividends. In addition, the senior credit facility, as amended, requires us to meet certain financial ratios, including the Fixed Charge Coverage Ratio, ~~and~~ the Adjusted Leverage ~~Ratio; however, we are not required to be in compliance with such ratios so long~~Ratio and the First Lien Coverage Ratio, all as defined under the amended senior credit ~~facility is cash collateralized.~~facility.

At ~~September 28, 2014~~March 29, 2015 there were no revolving credit borrowings outstanding under the senior credit facility. After reserving ~~$7.6~~$12.0 million for letters of credit issued under the senior credit facility for workers’ compensation and other

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insurance policies, ~~$12.4~~$8.0 million was available for revolving credit borrowings under the senior credit facility at ~~September 28, 2014~~.March 29, 2015. Giving effect to the amendment of the senior credit facility on April 29, 2015, $18.0 million would have been available for revolving credit borrowings at the end of the first quarter of 2015.

Contractual Obligations

A table of our contractual obligations as of December ~~29, 2013~~28, 2014 was included in Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the fiscal year ended December ~~29, 2013~~.28, 2014. There have been no significant changes to our contractual obligations during the ~~nine~~three months ended~~September 28, 2014~~. March 29, 2015.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements other than our operating leases, which are primarily for our restaurant properties and not recorded on our consolidated balance sheet.

Inflation

The inflationary factors that have historically affected our results of operations include increases in food and paper costs, labor and other operating expenses, the cost of providing medical and prescription drug insurance to our employees and energy costs. Wages paid in our restaurants are impacted by changes in the Federal and state hourly minimum wage rates. Accordingly, changes in the Federal and state hourly minimum wage rates directly affect our labor costs. We typically attempt to offset the effect of inflation, at least in part, through periodic menu price increases and various cost reduction programs. However, no assurance can be given that we will be able to offset such inflationary cost increases in the future.

Application of Critical Accounting Policies

Our unaudited interim consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America. Preparing consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. These estimates and assumptions are affected by the application of our accounting policies. Our significant accounting policies are described in the “Significant Accounting Policies” footnote in the notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended December ~~29, 2013~~.28, 2014. Critical accounting estimates are those that require application of management’s most difficult, subjective or complex judgments, often as a result of matters that are inherently uncertain and may

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change in subsequent periods. There have been no material changes affecting our critical accounting policies previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December ~~29, 2013~~.28, 2014.

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Forward Looking Statements

This Quarterly Report on Form 10-Q contains statements which constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Statements that are predictive in nature or that depend upon or refer to future events or conditions are forward-looking statements. These statements are often identified by the words “may”, “might", “will”, “should”, “anticipate”, “believe”, “expect”, “intend”, “estimate”, “hope”, “plan” or similar expressions. In addition, expressions of our strategies, intentions or plans are also forward looking statements. These statements reflect management’s current views with respect to future events and are subject to risks and uncertainties, both known and unknown. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their date. There are important factors that could cause actual results to differ materially from those in forward-looking statements, many of which are beyond our control. Investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those projected or implied in the forward-looking statements. We have identified significant factors that could cause actual results to differ materially from those stated or implied in the forward-looking statements. We believe important factors that could cause actual results to differ materially from our expectations include the following, in addition to other risks and uncertainties discussed herein and in our Annual Report on Form 10-K for the fiscal year ended December ~~29, 2013~~:

~~The effect of our tax-free spin-off of Fiesta in 2012, including any potential tax liability that may arise;~~28, 2014:

Effectiveness of the Burger King® advertising programs and the overall success of the Burger King brand;

Increases in food costs and other commodity costs;

Competitive conditions;

Our ability to integrate any restaurants we acquire;

Regulatory factors;

Environmental conditions and regulations;

General economic conditions, particularly in the retail sector;

Weather conditions;

Fuel prices;

Significant disruptions in service or supply by any of our suppliers or distributors;

Changes in consumer perception of dietary health and food safety;

Labor and employment benefit costs, including the effects of healthcare reform;

The outcome of pending or future legal claims or proceedings;

Our ability to manage our growth and successfully implement our business strategy;

Our inability to service our indebtedness;

Our borrowing costs and credit ratings, which may be influenced by the credit ratings of our competitors;

The availability and terms of necessary or desirable financing or refinancing and other related risks and uncertainties;

The effect of our tax-free spin-off of Fiesta Restaurant Group, Inc. in 2012, including any potential tax liability that may arise; and

Factors that affect the restaurant industry generally, including recalls if products become adulterated or misbranded, liability if our products cause injury, ingredient disclosure and labeling laws and regulations, reports of cases of food borne illnesses, and the possibility that consumers could lose confidence in the safety and quality of certain food products, as well as negative publicity regarding food quality, illness, injury or other health concerns.

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ITEM 3—QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There were no material changes from the information presented in Item 7A included in our Annual Report on Form 10-K for the year ended December ~~29, 2013~~,28, 2014, as amended, with respect to our market risk sensitive instruments.

A 1% change in interest rates would have resulted in no change to interest expense for the three months ended March 29, 2015 and a nominal change to interest expense for the three ~~and~~ ~~nine~~ months ended~~September 28, 2014~~ ~~and no change to interest expense for the three and~~ ~~nine months endedSeptember 29, 2013~~.

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March 30, 2014.

ITEM 4—CONTROLS AND PROCEDURES

Disclosure Controls and Procedures. Our senior management is responsible for establishing and maintaining disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d – 15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive officer or officers and principal financial officer or officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Evaluation of Disclosure Controls and Procedures. We have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report, with the participation of our Chief Executive Officer and Chief Financial Officer, as well as other key members of our management. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of ~~September 28, 2014~~.March 29, 2015.

No change occurred in our internal control over financial reporting during the ~~third~~first quarter of ~~2014~~2015 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings

~~None~~None.

Item 1A. Risk Factors

Part I-Item 1A of Annual Report on Form 10-K, as amended, for the fiscal year ended December ~~29, 2013~~28, 2014 describes important factors that could materially adversely affect our business, consolidated financial condition or results of operations or cause our operating results to differ materially from those indicated or suggested by forward-looking statements made in this Form 10-Q or presented elsewhere by management from time-to-time. There have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K, as amended, for the fiscal year ended December ~~29, 2013~~.28, 2014.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None

Item 3. Defaults Upon Senior Securities

None

Item 4. Mine Safety Disclosures

Not applicable

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Item 5. Other Information

None

Item 6. Exhibits

(a)The following exhibits are filed as part of this report.

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Exhibit No.
~~10.1~~4.1	~~Asset Purchase~~	Indenture governing the 8% Senior Secured Second Lien Notes due 2022, dated as of April 29, 2015, among Carrols Restaurant Group, Inc., the guarantors named therein and The Bank of New York Mellon Trust Company, N.A., as trustee
4.2		Form of 8% Senior Secured Second Lien Notes due 2022 (incorporated by reference to Exhibit 4.1)
4.3		Registration Rights Agreement, dated as of ~~August 22, 2014 between~~April 29, 2015, among Carrols ~~LLC~~Restaurant Group, Inc., the guarantors named therein and ~~Heartland Illinois Food Corp.~~Wells Fargo Securities, LLC
~~10.2~~4.4	~~Asset Purchase~~	Supplemental Indenture, dated as of April 29, 2015, among Carrols Restaurant Group, Inc., the guarantors named therein and The Bank of New York Mellon Trust Company, N.A., as trustee
10.1		Second Lien Security Agreement, dated as of ~~August 22, 2014 between~~April 29, 2015, among Carrols ~~LLC~~Restaurant Group, Inc., the guarantors named therein and ~~Heartland Indiana LLC~~The Bank of New York Mellon Trust Company, N.A., as collateral agent
~~10.3~~10.2	~~Asset Purchase~~	Second Amendment to Credit Agreement and First Amendment to Security Agreement, dated as of ~~August 22, 2014 between~~April 29, 2015, among Carrols ~~LLC~~Restaurant Group, Inc., the guarantors named therein, the lenders named therein and ~~Heartland Midwest LLC~~Wells Fargo Bank, N.A., as administrative agent.
31.1		Chief Executive Officer’s Certificate Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for Carrols Restaurant Group, Inc.
31.2		Chief Financial Officer’s Certificate Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for Carrols Restaurant Group, Inc.
32.1		Chief Executive Officer’s Certificate Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for Carrols Restaurant Group, Inc.
32.2		Chief Financial Officer’s Certificate Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for Carrols Restaurant Group, Inc.
101.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Extension Schema Document
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		XBRL Taxonomy Extension Label Linkbase Document
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.




	CARROLS RESTAURANT GROUP, INC.

Date: ~~November~~May 6, ~~2014~~2015	/s/ Daniel T. Accordino
	(Signature)
	Daniel T. Accordino Chief Executive Officer

Date: ~~November~~May 6, ~~2014~~2015	/s/ Paul R. Flanders
	(Signature)
	Paul R. Flanders Vice President – Chief Financial Officer and Treasurer



									Retained			Accumulated
						Additional			Earnings			Other					Total
	Common Stock			Preferred		Paid-In			(Accumulated			Comprehensive		Treasury			Stockholders'
	Shares	Amount		Stock		Capital			Deficit)			Income		Stock			Equity
Balance at December 30, 2012	22,748,241	$	227	$	—	$	68,056		$	21,362		$	669	$	(141	)	$	90,173
Stock-based compensation	—	—		—		1,205			—			—		—			1,205
Vesting of non-vested shares and excess tax benefits	300,093	3		—		(3		)	—			—		—			—
Distribution of Fiesta Restaurant Group's net assets	—	—		—		—			(688		)	—		—			(688		)
Net loss	—	—		—		—			(13,519		)	—		—			(13,519		)
Change in postretirement benefit obligations, net of tax of $30	—	—		—		—			—			33		—			33
Balance at December 29, 2013	23,048,334	230		—		69,258			7,155			702		(141		)	77,204
Stock-based compensation	—	—		—		883			—			—		—			883
Vesting of non-vested shares and excess tax benefits	275,726	3		—		(3		)	—			—		—			—
Public stock offering (Note 13)	11,500,000	115		—		67,212			—			—		—			67,327
Net loss	—	—		—		—			(11,082		)	—		—			(11,082		)
Balance at September 28, 2014	34,824,060	$	348	$	—	$	137,350		$	(3,927	)	$	702	$	(141	)	$	134,332



	Shares		Weighted Average Grant Date Price
Non-vested at December 29, 2013	662,923		$	7.35
Granted	14,048		7.12
Vested	(275,726	)	8.29
Forfeited	(2,540	)	10.13
Nonvested at September 28, 2014	398,705		$	6.67



Balance at December 30, 2012 and December 29, 2013	$	8,162
Acquisition of restaurants (Note 2)	55
Balance at September 28, 2014	$	8,217



	Nine Months Ended
	September 28, 2014		%⁽¹⁾		September 29, 2013		%⁽¹⁾
Restaurant Sales:
Legacy restaurants	$	274,394			$	275,383
2012 acquired restaurants	216,880				222,586
2014 acquired restaurants	8,584				—
Total	$	499,858			$	497,969

Restaurant-Level EBITDA Margin:
Legacy restaurants	$	36,356	13.2	%	$	38,692	14.1	%
2012 acquired restaurants	16,136		7.4	%	11,315		5.1	%
2014 acquired restaurants	842		9.8	%	—		—	%
Total	$	53,334	10.7	%	$	50,007	10.0	%