10-Q
Table of Contents

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 27, 2015
OR
¨
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 2, 2015, Carrols Restaurant Group, Inc. had 35,508,660 shares of its common stock, $.01 par value, outstanding.


Table of Contents

CARROLS RESTAURANT GROUP, INC.
FORM 10-Q
QUARTER ENDED September 27, 2015
 
 
 
Page
 
 
 
 
Item 1
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2
 
 
 
Item 3
 
 
 
Item 4
 
 
 
 
 
 
Item 1
 
 
 
Item 1A
 
 
 
Item 2
 
 
 
Item 3
 
 
 
Item 4
 
 
 
Item 5
 
 
 
Item 6

2

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 27, 2015
 
December 28, 2014
ASSETS
 
 
 
Current assets:
 
 
 
Cash
$
71,833

 
$
21,221

Trade and other receivables
5,448

 
4,034

Inventories
6,698

 
7,785

Prepaid rent
1,659

 
3,164

Prepaid expenses and other current assets
5,388

 
3,009

Refundable income taxes

 
2,416

Deferred income taxes
1,615

 
1,642

Total current assets
92,641

 
43,271

Property and equipment, net of accumulated depreciation of $219,623 and $206,448, respectively
188,203

 
179,383

Franchise rights, net of accumulated amortization of $86,618 and $83,184, respectively (Note 3)
100,045

 
102,900

Goodwill (Note 3)
18,384

 
17,793

Franchise agreements, at cost less accumulated amortization of $8,126 and $7,502, respectively
14,887

 
14,602

Favorable leases, net of accumulated amortization of $1,247 and $841, respectively (Note 3)
4,319

 
4,725

Deferred financing costs
5,036

 
3,399

Other assets
1,688

 
3,324

Total assets
$
425,203

 
$
369,397

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Current portion of long-term debt (Note 6)
$
1,333

 
$
1,272

Accounts payable
17,163

 
19,239

Accrued interest
6,891

 
2,170

Accrued payroll, related taxes and benefits
24,824

 
17,321

Accrued real estate taxes
5,094

 
4,908

Other liabilities
14,668

 
10,273

Total current liabilities
69,973

 
55,183

Long-term debt, net of current portion (Note 6)
206,393

 
157,422

Lease financing obligations
1,203

 
1,202

Deferred income—sale-leaseback of real estate
13,154

 
15,108

Deferred income taxes
1,615

 
1,642

Accrued postretirement benefits
3,164

 
3,121

Unfavorable leases, net of accumulated amortization of $3,226 and $2,240, respectively (Note 3)
12,227

 
13,027

Other liabilities (Note 5)
16,882

 
16,157

Total liabilities
324,611

 
262,862

Commitments and contingencies (Note 9)

 

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—35,508,660 and 35,222,667 shares, respectively, and outstanding—35,036,710 and 34,827,240 shares, respectively
350

 
348

Additional paid-in capital
138,716

 
137,647

Accumulated deficit
(37,976
)
 
(30,962
)
Accumulated other comprehensive loss
(357
)
 
(357
)
Treasury stock, at cost
(141
)
 
(141
)
Total stockholders’ equity
100,592

 
106,535

Total liabilities and stockholders’ equity
$
425,203

 
$
369,397


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

CARROLS RESTAURANT GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
THREE AND NINE MONTHS ENDED SEPTEMBER 27, 2015 AND SEPTEMBER 28, 2014
(In thousands of dollars, except share and per share amounts)
(Unaudited)
 
Three Months Ended
 
Nine Months Ended
 
September 27, 2015
 
September 28, 2014
 
September 27, 2015
 
September 28, 2014
Restaurant sales
$
217,676

 
$
179,822

 
$
629,948

 
$
499,858

Costs and expenses:
 
 
 
 
 
 
 
Cost of sales
60,676

 
55,169

 
178,022

 
148,606

Restaurant wages and related expenses
67,116

 
56,023

 
197,135

 
159,764

Restaurant rent expense
14,106

 
12,205

 
43,101

 
35,269

Other restaurant operating expenses
34,261

 
29,179

 
100,407

 
82,264

Advertising expense
8,188

 
6,794

 
23,551

 
20,621

General and administrative (including stock-based compensation expense of $367, $296, $1,071 and $883, respectively)
11,764

 
10,031

 
36,263

 
28,923

Depreciation and amortization
9,418

 
9,318

 
29,216

 
27,121

Impairment and other lease charges (Note 4)
396

 
773

 
2,732

 
1,822

Other expense (income)

 

 
(126
)
 
25

Total operating expenses
205,925

 
179,492

 
610,301

 
504,415

Income (loss) from operations
11,751

 
330

 
19,647

 
(4,557
)
Interest expense
4,512

 
4,683

 
14,026

 
14,080

Loss on extinguishment of debt (Note 6)

 

 
12,635

 

Income (loss) before income taxes
7,239

 
(4,353
)
 
(7,014
)
 
(18,637
)
Benefit for income taxes (Note 7)

 
(2,632
)
 

 
(7,555
)
Net income (loss)
$
7,239

 
$
(1,721
)
 
$
(7,014
)
 
$
(11,082
)
 
 
 
 
 
 
 
 
Basic and diluted net income (loss) per share (Note 11):
$
0.16

 
$
(0.05
)
 
$
(0.20
)
 
$
(0.37
)
Shares used in computing net income (loss) per share:
 
 
 
 
 
 
 
Basic weighted average common shares outstanding (Note 11)
35,009,656

 
34,797,490

 
34,930,326

 
29,571,846

Diluted weighted average common shares outstanding (Note 11)
44,678,514

 
34,797,490

 
34,930,326

 
29,571,846

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Net income (loss)
$
7,239

 
$
(1,721
)
 
$
(7,014
)
 
$
(11,082
)
Other comprehensive income (loss)

 

 

 

Comprehensive income (loss)
$
7,239

 
$
(1,721
)
 
$
(7,014
)
 
$
(11,082
)

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

CARROLS RESTAURANT GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 27, 2015 AND SEPTEMBER 28, 2014
(In thousands of dollars)
(Unaudited)
 
Nine Months Ended
 
September 27, 2015
 
September 28, 2014
Cash flows provided from operating activities:
 
 
 
Net loss
$
(7,014
)
 
$
(11,082
)
Adjustments to reconcile net loss to net cash provided from operating activities:
 
 
 
Loss on disposals of property and equipment
252

 
321

Stock-based compensation
1,071

 
883

Impairment and other lease charges
2,732

 
1,822

Depreciation and amortization
29,216

 
27,121

Amortization of deferred financing costs
663

 
754

Amortization of deferred gains from sale-leaseback transactions
(1,953
)
 
(1,345
)
Deferred income taxes

 
(7,774
)
Change in refundable income taxes
2,416

 
177

Loss on extinguishment of debt
12,635

 

Changes in other operating assets and liabilities
15,567

 
53

Net cash provided from operating activities
55,585

 
10,930

Cash flows used for investing activities:
 
 
 
Capital expenditures:
 
 
 
New restaurant development
(556
)
 
(1,661
)
Restaurant remodeling
(27,807
)
 
(23,345
)
Other restaurant capital expenditures
(7,367
)
 
(4,533
)
Corporate and restaurant information systems
(1,801
)
 
(3,173
)
Total capital expenditures
(37,531
)
 
(32,712
)
Acquisition of restaurants, net of cash acquired
(1,657
)
 
(13,021
)
Proceeds from sale of other assets
534

 
54

Properties purchased for sale-leaseback
(3,575
)
 
(3,412
)
Proceeds from sale-leaseback transactions
3,136

 
6,604

Net cash used for investing activities
(39,093
)
 
(42,487
)
Cash flows provided from financing activities:
 
 
 
Proceeds from issuance of 8% senior secured second lien notes
200,000

 

Redemption of 11.25% senior secured second lien notes
(159,771
)
 

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
(945
)
 
(756
)
Financing costs associated with issuance of debt
(5,164
)
 
(7
)
Net cash provided from financing activities
34,120

 
66,564

Net increase in cash
50,612

 
35,007

Cash, beginning of period
21,221

 
8,302

Cash, end of period
$
71,833

 
$
43,309

Supplemental disclosures:
 
 
 
Interest paid on long-term debt
$
8,565

 
$
9,019

Interest paid on lease financing obligations
$
77

 
$
77

Accruals for capital expenditures
$
3,084

 
$
2,514

Income taxes refunded
$
2,416

 
$
41

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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Table of Contents
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 27, 2015 Carrols Restaurant Group, Inc. ("Carrols Restaurant Group") operated, as franchisee, 660 restaurants under the trade name “Burger King®” in 15 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 subsidiary, Carrols LLC, a Delaware limited liability company. The unaudited consolidated financial statements presented herein include the accounts of Carrols Restaurant Group and its wholly-owned subsidiary Carrols.
Unless the context otherwise requires, Carrols Restaurant Group, Carrols and Carrols LLC are collectively referred to as the “Company.” All intercompany transactions have been eliminated in consolidation.
Fiscal Year. The Company uses a 52-53 week fiscal year ending on the Sunday closest to December 31. The fiscal year ended December 28, 2014 contained 52 weeks. The three and nine months ended September 27, 2015 and September 28, 2014 each contained thirteen and thirty-nine weeks, respectively. The 2015 fiscal year will end January 3, 2016 and will contain 53 weeks.
Basis of Presentation. The accompanying unaudited consolidated financial statements for the three and nine months ended September 27, 2015 and September 28, 2014 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 the three and nine months ended September 27, 2015 and September 28, 2014 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 28, 2014. The December 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, evaluation for impairment of goodwill, long-lived assets and franchise rights and lease accounting 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, however resource allocation decisions are made on a total-company basis. The Company derives all significant revenues from a single operating segment. Accordingly, the Company views the operating results 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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Table of Contents
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 8% Senior Secured Second Lien Notes due 2022 is based on a recent trading value, which is considered Level 2, and at September 27, 2015 was approximately $211.8 million.
Fair value measurements of non-financial assets and non-financial liabilities are primarily used in the impairment analysis of long-lived assets and intangible assets. Long-lived assets and definite-lived intangible assets are measured at fair value on a nonrecurring basis using Level 3 inputs. Goodwill is reviewed annually for impairment on the last day of the fiscal year, or more frequently, if impairment indicators arise.     
Recently Issued Accounting Pronouncements. In September 2015, the FASB issued ASU No. 2015-16 Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments, which requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. These amendments require the acquirer to record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting for the acquisition activity had been completed at the acquisition date. The amendments also require an entity to separately present or disclose the portion of the amount recorded in the current-period earnings, by line item, that would have been reflected in previous reporting periods. This amendment is effective for fiscal years beginning after December 15, 2015, with early adoption permitted. The Company will implement this guidance in fiscal 2016.
In April 2015, the FASB issued ASU 2015-03, Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. This ASU requires debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying value of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by this ASU. The amendments in this ASU are effective retrospectively for fiscal years, and interim periods within those years, beginning after December 15, 2015. Early adoption is permitted. Deferred financing costs that will be presented as a reduction from the carrying value of The Company's outstanding debt upon adoption were $4.7 million at September 27, 2015.
In April 2015, the FASB issued ASU No. 2015-05, Intangibles-Goodwill and Other-Internal Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement, which provides guidance to customers for accounting for fees in a cloud computing arrangement. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. If a cloud computing arrangement includes a software license, the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. ASU 2015-05 is effective for annual and interim periods beginning after December 15, 2015 with early adoption permitted. The Company does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.

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Table of Contents
CARROLS RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in thousands of dollars except share and per share amounts)


2. Acquisitions
Since the beginning of the first quarter of 2014, the Company has acquired an aggregate of 132 restaurants from other franchisees, which we refer to as the "2014 and 2015 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
March 31, 2015
 
4

 
794

 
Northern Vermont
August 4, 2015
 
5

 
663

 
South Carolina
 
 
132

 
$
53,657

 
 
(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 consolidated statements of operations include restaurant sales related to the 2014 and 2015 acquisitions for the three and nine months ended September 27, 2015 of $39.4 million and $110.8 million, respectively, and for the three and nine months ended September 28, 2014 of $7.8 million and $8.6 million, respectively. It is impracticable to disclose net earnings for the post-acquisition periods 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 for the 2014 and 2015 acquisitions on the results of operations for the three and nine months ended September 28, 2014 and September 27, 2015 is included below. The pro forma results of operations are not necessarily indicative of the results that would have occurred had the 2014 and 2015 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
 
Nine Months Ended
 
September 27, 2015
 
September 28, 2014
 
September 27, 2015
 
September 28, 2014
Restaurant sales
$
218,154

 
$
209,996

 
$
634,061

 
$
600,197

Net income (loss)
$
7,319

 
$
(814
)
 
$
(6,669
)
 
$
(8,011
)
Basic and diluted net income (loss) per share
$
0.16

 
$
(0.02
)
 
$
(0.19
)
 
$
(0.27
)
This pro forma financial information does not give effect to any anticipated synergies, operating efficiencies or cost savings or any transaction costs related to the 2014 and 2015 acquired restaurants.
On October 1, 2015, the Company completed the acquisition of five restaurants in Ohio and West Virginia for a purchase price of $5.0 million, including one fee-owned property, and on October 20, 2015 the Company completed the acquisition of one restaurant in Michigan for a purchase price of $0.7 million.

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Table of Contents
CARROLS RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in thousands of dollars except share and per share amounts)


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 of goodwill is less than the related carrying amount, an impairment loss is recognized. The Company performs its annual impairment assessment as of the last day of 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 ended September 27, 2015 and September 28, 2014. The change in goodwill for the nine months ended September 27, 2015 is summarized below:
Balance at December 28, 2014
$
17,793

Acquisition of nine restaurants (Note 2)
591

Balance at September 27, 2015
$
18,384

Franchise Rights. Amounts allocated to franchise rights for each acquisition of Burger King restaurants are amortized using the straight-line method over the average remaining term of the acquired franchise agreements plus one twenty-year renewal period.
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 for the three and nine months ended September 27, 2015 or September 28, 2014. The change in franchise rights for the nine months ended September 27, 2015 is summarized below:
Balance at December 28, 2014
$
102,900

Acquisition of nine restaurants (Note 2)
579

Amortization expense
(3,434
)
Balance at September 27, 2015
$
100,045

Amortization expense related to franchise rights was $1.2 million and $1.1 million for the three months ended September 27, 2015 and September 28, 2014, respectively, and $3.4 million and $3.2 million for the nine months ended September 27, 2015 and September 28, 2014, respectively. The Company expects annual amortization expense to be $4.7 million in 2015 and in each of the 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. Additions to unfavorable leases from the 2015 acquisitions referenced in Note 2 totaled $0.2 million for the three and nine months ended September 27, 2015.
The net reduction of rent expense related to the amortization of favorable and unfavorable leases was $0.2 million for both the three months ended September 27, 2015 and September 28, 2014, and was $0.6 million and $0.5 million for the nine months ended September 27, 2015 and September 28, 2014, respectively. The Company expects the net annual reduction of rent expense to be $0.8 million for all of 2015 and 2016, $0.7 million in 2017 and 2018 and $0.6 million in 2019 and 2020.

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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 27, 2015, the Company recorded asset impairment charges of $0.4 million, resulting primarily from capital expenditures at previously impaired restaurants. During the nine months ended September 27, 2015, the Company recorded other lease charges of $1.5 million associated with the closure of ten of the Company's restaurants and asset impairment charges of $1.2 million, including $1.0 million of capital expenditures at previously impaired restaurants.
During the three months ended September 28, 2014, the Company recorded impairment and other lease charges of $0.8 million consisting of asset impairment charges of $0.4 million due primarily to capital expenditures at previously impaired restaurants and other lease charges of $0.3 million associated with the closure of two of the Company's restaurants. During the nine months ended September 28, 2014, the Company recorded other lease charges of $0.8 million associated with the closure of three of the Company's restaurants, including $0.1 million to terminate an operating lease, and asset impairment charges of $1.0 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 accrual for closed restaurant locations:
 
Nine Months Ended
 
Year Ended
 
September 27, 2015
 
December 28, 2014
Balance, beginning of the period
$
1,721

 
$
1,466

Provisions for restaurant closures
1,472

 
724

Changes in estimates of accrued costs
(45
)
 
87

Payments, net
(1,003
)
 
(721
)
Other adjustments, including the effect of discounting future obligations
157

 
165

Balance, end of the period
$
2,302

 
$
1,721


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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)


5. Other Liabilities, Long-Term
Other liabilities, long-term, at September 27, 2015 and December 28, 2014 consisted of the following:
 
September 27, 2015
 
December 28, 2014
Accrued occupancy costs
$
10,195

 
$
9,287

Accrued workers’ compensation and general liability claims
3,517

 
3,211

Deferred compensation
885

 
567

Long-term obligation to BKC for right of first refusal
378

 
939

Other
1,907

 
2,153

 
$
16,882

 
$
16,157

Accrued occupancy costs above include long-term obligations pertaining to closed restaurant locations, contingent rent, and accruals to expense operating lease rental payments on a straight-line basis over the lease term.
6. Long-term Debt
Long-term debt at September 27, 2015 and December 28, 2014 consisted of the following:
 
September 27, 2015
 
December 28, 2014
Collateralized:
 
 
 
Carrols Restaurant Group 8% Senior Secured Second Lien Notes
$
200,000

 
$

Carrols Restaurant Group 11.25% Senior Secured Second Lien Notes

 
150,000

Capital leases
7,726

 
8,694

 
207,726

 
158,694

Less: current portion
(1,333
)
 
(1,272
)
 
$
206,393

 
$
157,422

On April 29, 2015, the Company issued $200.0 million of 8% Senior Secured Second Lien Notes due 2022 (the "8% Notes") pursuant to an indenture dated as of April 29, 2015 governing such notes. In connection with the issuance of the 8% Notes, on April 15, 2015 the Company commenced a cash tender offer to purchase or redeem its outstanding $150.0 million aggregate principal amount of 11.25% Senior Secured Second Lien Notes (the "11.25% Notes"). The tender and redemption premium associated with the repurchase and redemption of the 11.25% Notes and other transactions costs of approximately $9.8 million and the write-off of $2.8 million of previously deferred financing costs related to the 11.25% Notes are reflected as loss on extinguishment of debt in the nine months ended September 27, 2015.
8% Notes. The 8% Notes mature and are payable on May 1, 2022. Interest is payable semi-annually on May 1 and November 1 commencing November 1, 2015. The 8% 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 8% Notes are redeemable at the option of the Company in whole or in part at any time after May 1, 2018 at a price of 104% of the principal amount plus accrued and unpaid interest, if any, if redeemed before May 1, 2019, 102% of the principal amount plus accrued and unpaid interest, if any, if redeemed after May 1, 2019 but before May 1, 2020 and 100% of the principal amount plus accrued and unpaid interest, if any, if redeemed after May 1, 2020. Prior to May 1, 2018, the Company may redeem some or all of the 8% 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 8% Notes also provides that the Company may redeem up to 35% of the 8% Notes using the proceeds of certain equity offerings completed before May 15, 2018.

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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 8% Notes are 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 Carrols Restaurant Group is a holding company that has no independent assets or operations. There are no significant restrictions on its 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 8% Notes includes certain covenants, including limitations and restrictions on the Company and its 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 the Company's assets.
The indenture governing the 8% Notes and the security agreement provide that any capital stock and equity interests of any of the Company's 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 8% Notes then outstanding.
The indenture governing the 8% Notes contains customary default provisions, including without limitation, a cross default provision pursuant to which it is an event of default under the 8% Notes and the indenture governing the 8% Notes if there is a default under any of the Company's indebtedness having an outstanding principal amount of $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.
Senior Credit Facility. On April 29, 2015, the Company entered into an amendment to its senior credit facility which increased aggregate revolving credit borrowings, extended the maturity term, increased potential incremental increases in revolving credit borrowings (subject to approval of the lenders), amended certain financial ratios and reduced the interest rate for revolving credit borrowings.
The Company's senior credit facility, as amended, provides for aggregate revolving credit borrowings of up to $30.0 million (including $20.0 million available for letters of credit) and matures on April 29, 2020. The senior credit facility, as amended, also provides for potential incremental borrowing increases of up to $25.0 million, in the aggregate. At September 27, 2015, there were no revolving credit borrowings outstanding under the senior credit facility.
Effective on April 29, 2015, borrowings under the senior credit facility bear interest at a rate per annum, at the Company’s option, of:
(i) the Alternate Base Rate plus the applicable margin of 2.00% to 2.75% based on the Company’s Adjusted Leverage Ratio, or
(ii) the LIBOR Rate plus the applicable margin of 3.00% to 3.75% based on the Company’s Adjusted Leverage Ratio.
At September 27, 2015 the Company's LIBOR rate margin was 3.50% based on the Company's Adjusted Leverage 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 is 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,

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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)


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, Adjusted Leverage Ratio and First Lien Leverage Ratio (all as defined under the amended senior credit facility). The Company was in compliance with the covenants under its senior credit facility at September 27, 2015.
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 $12.0 million for letters of credit issued under the senior credit facility for workers’ compensation and other insurance policies, $18.0 million was available for revolving credit borrowings under the senior credit facility at September 27, 2015.
7. Income Taxes
The benefit for income taxes for the three and nine months ended September 27, 2015 and September 28, 2014 was comprised of the following:
 
Three Months Ended
 
Nine Months Ended
 
September 27, 2015
 
September 28, 2014
 
September 27, 2015
 
September 28, 2014
Current
$

 
$

 
$

 
$
219

Deferred
1,989

 
(2,632
)
 
(4,210
)
 
(7,774
)
Valuation allowance
(1,989
)
 

 
$
4,210

 
$

 
$

 
$
(2,632
)
 
$

 
$
(7,555
)
The benefit for income taxes for the three and nine months ended September 28, 2014 was derived using an estimated effective annual income tax rate for 2014 of 37.5%, which excluded any discrete tax adjustments.
The Company performed an assessment of positive and negative evidence regarding the realization of its deferred income tax assets at December 28, 2014 as required by ASC 740. Under ASC 740, the weight given to negative and 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. Consequently,  the Company recorded no expense or benefit from income taxes in the three months and nine months ended September 27, 2015.
The Company decreased its valuation reserve by $1.9 million in the three months ended September 27, 2015 and increased its valuation reserve by $4.3 million in the nine months ended September 27, 2015 for changes in the net deferred income tax assets recognized in the respective periods. At September 27, 2015, the Company's valuation allowance on all its net deferred tax assets was $31.7 million.
The Company's net deferred tax assets at September 27, 2015 included $3.4 million related to certain state net operating loss carryforwards, of which the most significant states begin to expire in 2025. The Company's federal net operating loss carryforwards expire beginning in 2033. As of September 27, 2015, the Company had federal net operating loss carryforwards of approximately $36.5 million.

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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 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's policy is to recognize interest and/or penalties related to uncertain tax positions in income tax expense. At September 27, 2015 and December 28, 2014, the Company had no unrecognized tax benefits and no accrued interest related to uncertain tax positions. The tax years 2012 - 2014 remain 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. Stock-Based Compensation
Stock-based compensation expense in the three months ended September 27, 2015 and September 28, 2014 was $0.4 million and $0.3 million, respectively, and for the nine months ended September 27, 2015 and September 28, 2014 was $1.1 million and $0.9 million, respectively. As of September 27, 2015, the total unrecognized stock-based compensation expense relating to non-vested shares was approximately $2.9 million, which the Company expects to recognize over a remaining weighted average vesting period for non-vested shares of 2.6 years. The Company expects to record an additional $0.4 million as compensation expense for the remainder of 2015.
A summary of all non-vested shares activity for the nine months ended September 27, 2015 was as follows:
 
Shares
 
Weighted Average Grant Date Price
Non-vested at December 28, 2014
395,427

 
$
6.68

Granted
295,741

 
7.89

Vested
(209,470
)
 
7.28

Forfeited
(9,748
)
 
6.21

Non-vested at September 27, 2015
471,950

 
7.39

The fair value of the non-vested shares is based on the 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 27, 2015, the Company is a guarantor under 31 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 27, 2015 was $34.0 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.

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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)


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 Burger King Corporation ("BKC") 100 shares of Series A Convertible Preferred Stock which is convertible into 9,414,580 shares of Carrols Restaurant Group Common Stock, which currently constitutes approximately 21.0% of the outstanding shares of the Company's common stock on a fully diluted basis. Pursuant to the terms of the Series A Convertible Preferred Stock, BKC has two representatives on the Company's board of directors.
Each of 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% of sales. Royalty expense was $9.2 million and $7.6 million in the three months ended September 27, 2015 and September 28, 2014, respectively and was $26.5 million and $21.0 million in the nine months ended September 27, 2015 and September 28, 2014, respectively.
The Company is also generally required to contribute 4% of restaurant sales from 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 $8.1 million and $6.8 million in the three months ended September 27, 2015 and September 28, 2014, respectively, and was $23.5 million and $20.3 million in the nine months ended September 27, 2015 and September 28, 2014, respectively.
As of September 27, 2015, the Company leased 290 of its restaurant locations from BKC and for 164 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 these BKC leases for the three months ended September 27, 2015 and September 28, 2014 was $7.0 million and $6.7 million, respectively, and was $21.4 million and $19.6 million for the nine months ended September 27, 2015 and September 28, 2014, respectively.
The Company believes the related party lease terms have not been significantly affected by the fact that the Company and BKC are deemed related parties.
As of September 27, 2015, the Company owed BKC $1.1 million associated with its purchase of BKC's right of first refusal in 20 states as part of the acquisition of restaurants from BKC in 2012 and $5.7 million related to the payment of advertising, royalties and rent, which is remitted on a monthly basis.
11. Net Income (Loss) per Share
The Company applies the two-class method to calculate and present net income (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. As the Company incurred net losses for the nine months ended September 27, 2015 and September 28, 2014 and the three months ended September 28, 2014 and those losses are not allocated to the participating securities under the two-class method, such method is not applicable for the aforementioned reporting periods.

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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)


Basic net income (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 income (loss) per share reflects additional shares of common stock outstanding, where applicable, calculated using the treasury stock method or the two-class method.
The following table sets forth the calculation of basic and diluted net income (loss) per share:
 
Three Months Ended
 
Nine Months Ended
 
September 27, 2015
 
September 28, 2014
 
September 27, 2015
 
September 28, 2014
Basic net income (loss) per share:
 
 
 
 
 
 
 
Net income (loss)
$
7,239

 
$
(1,721
)
 
$
(7,014
)
 
$
(11,082
)
Less: Income attributable to non-vested restricted shares
(80
)
 

 

 

Less: Income attributable to preferred stock
(1,517
)
 

 

 

Net income available to common stockholders
$
5,642

 
$
(1,721
)
 
$
(7,014
)
 
$
(11,082
)
Weighted average common shares outstanding
35,009,656

 
34,797,490

 
34,930,326

 
29,571,846

Basic net income (loss) per share
$
0.16

 
$
(0.05
)
 
$
(0.20
)
 
$
(0.37
)
Diluted net income (loss) per share:
 
 
 
 
 
 
 
Shares used in computed basic net income (loss) per share
35,009,656

 
34,797,490

 
34,930,326

 
29,571,846

Dilutive effect of preferred stock and non-vested shares
9,668,858

 

 

 

Shares used in computed diluted net income (loss) per share
44,678,514

 
34,797,490

 
34,930,326

 
29,571,846

Diluted net income (loss) per share
$
0.16

 
$
(0.05
)
 
$
(0.20
)
 
$
(0.37
)
Shares excluded from diluted net income (loss) per share computation (1)

 
9,813,285

 
9,886,530

 
9,813,285

(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.

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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 28, 2014 contained 52 weeks and the three and nine months ended September 27, 2015 and September 28, 2014 each contained thirteen and thirty-nine weeks, respectively. The current fiscal year will end January 3, 2016 and 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 for the year ended December 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.
Results of Operations—an analysis of our results of operations for the three and nine months ended September 27, 2015 compared to the three and nine months ended September 28, 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 55 years. We are the largest Burger King® franchisee in the United States, based on number of restaurants, and have operated Burger King restaurants since 1976. As of September 27, 2015, we operated 660 Burger King restaurants in 15 states. In the first nine months of 2015 we acquired four restaurants in Northern Vermont and five restaurants in South Carolina and during the year ended December 28, 2014 we acquired 123 Burger King restaurants in five separate transactions, which we refer to collectively as the “2014 and 2015 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 27, 2015 we were operating 247 of the 2012 acquired restaurants. All of our other Burger King restaurants we operated before 2012 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 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.
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 or 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, acquisition costs, stock compensation expense and loss on extinguishment of debt. Restaurant-Level EBITDA represents net income or 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

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operations. Management believes that Adjusted EBITDA and Restaurant-Level EBITDA, when viewed with our results of operations in accordance with GAAP and the accompanying reconciliations on page 28, 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, net income or loss from operations or cash provided 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 loss from operations see page 28.
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 these charges (such as impairment and other lease charges and acquisition 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 27, 2015, there were $2.3 million of lease charges accrued for closed locations.
Interest expense consists primarily of interest expense associated with our $200.0 million of 8% Senior Secured Second Lien Notes due 2022 (the "8% Notes"), our prior 11.25% Senior Secured Second Lien Notes due 2018 (the "11.25% Notes"), amortization of deferred financing costs and revolving credit borrowings under our senior credit facility.
Loss on extinguishment of debt consists of the tender and redemption premium and related costs to repurchase and redeem $150.0 million of the 11.25% Notes and the write-off of the related unamortized deferred financing costs.

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Recent and Future Events Affecting our Results of Operations
Refinancing of Indebtedness
On April 29, 2015, we issued $200 million of 8% Notes and used a portion of the net proceeds to repurchase and redeem all of our $150 million of outstanding 11.25% Notes tendered pursuant to a cash tender offer and redemption and to pay related fees and expenses. We received net proceeds of approximately $35.2 million which are being used for working capital and general corporate purposes, capital expenditures to remodel our restaurants and future Burger King restaurant acquisitions.
On April 29, 2015, we entered into an amendment to our 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 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, we expect interest expense in the fourth quarter of 2015 to be approximately $0.2 million lower than the fourth quarter of 2014. See —"Liquidity and Capital Resources" for a discussion of the 8% Notes and our senior credit facility, as amended.

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2014 and 2015 Burger King Restaurant Acquisitions
Since the beginning of 2014, we have acquired 132 restaurants from other franchisees in the following transactions ($ in thousands):
Closing Date
 
Number of Restaurants
 
Purchase Price
Market Location
April 30, 2014
 
4

 
$
681

Fort Wayne, Indiana
June 30, 2014
 
4

 
3,819

Pittsburgh, Pennsylvania
July 22, 2014
 
21

 
8,609

Rochester, New York and Southern Tier of Western New York
October 8, 2014
 
30

 
20,330

Wilmington and Greenville, North Carolina
November 4, 2014
 
64

 
18,761

Nashville, Tennessee; Indiana and Illinois
March 31, 2015
 
4

 
794

Northern Vermont
August 4, 2015
 
5

 
663

South Carolina
 
 
132

 
$
53,657

 
The April 30, 2014, June 30, 2014, October 8, 2014 and the August 4, 2015 acquisitions were from the exercise of our ROFR. Included in the purchase prices above were the acquisition of 13 fee-owned properties of which eleven have been subsequently sold in sale-leaseback transactions for net proceeds of $14.1 million.
The pro forma impact on the results of operations for the 2014 and 2015 acquisitions 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 our unaudited pro forma operating results:
 
Three Months Ended
 
Nine Months Ended
 
September 27, 2015
September 28, 2014
 
September 27, 2015
September 28, 2014
Restaurant sales
$
218,154

$
209,996

 
$
634,061

$
600,197

Income from operations
$
11,831

$
1,970

 
$
19,992

$
357

Adjusted EBITDA
$
22,020

$
13,131

 
$
53,076

$
32,982

2015 Capital Expenditures and Remodeling Commitment with BKC
On January 26, 2015, we entered into the First Amendment to Operating Agreement (the "BKC Remodeling Agreement") with BKC, in which we agreed to remodel to BKC's current 20/20 image a cumulative total of 410 restaurants by December 31, 2015 and 455 restaurants by December 31, 2016. If we do not complete the remodels as scheduled or otherwise modify the schedule, the ROFR would be suspended until we complete the number of remodels required at that date. As of September 27, 2015 we had remodeled a total of 343 restaurants to the 20/20 restaurant image pursuant to the BKC Remodeling Agreement and currently expect to complete a total of 375 to 380 remodels by December 31, 2015.
In addition, in connection with our acquisition of 64 Burger King restaurants on November 4, 2014 we agreed to remodel 46 of those restaurants over five years beginning in 2014 and as of September 27, 2015 we had remodeled 13 of these restaurants.
In 2015, we anticipate that total capital expenditures will range from $50 million to $55 million, although the actual amount of capital expenditures may differ from these estimates. Capital expenditures in 2015 are expected to include approximately $39 million to $41 million for remodeling a total of 90 to 95 restaurants to the BKC 20/20 image at an approximate average cost (excluding four restaurants which we will scrape and rebuild) of $425,000 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.

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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 2014, we closed 13 restaurants excluding one restaurant relocated within its market area. In the first nine months of 2015 we closed 22 restaurants and sold one restaurant.
We currently anticipate that in 2015 we will close up to 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 Adjusted EBITDA from restaurant closures will be material, although there can be no assurance in this regard.
Valuation of Deferred Income Tax Assets
We performed an assessment of positive and negative evidence, including our three-year cumulative loss position, regarding the realization of our deferred income tax assets at December 28, 2014 and determined that a valuation allowance was needed for all of our net deferred income tax assets at December 28, 2014. As a result, we recorded a valuation reserve of $24.3 million in the fourth quarter of 2014.
For the nine months ended September 27, 2015 we increased our valuation reserve by $4.3 million for our incremental net deferred income tax assets in the period. Consequently, we have recorded no expense or benefit from income taxes in the first nine months of 2015. At September 27, 2015, our valuation allowance on all of our net deferred tax assets was $31.7 million, which included $3.4 million related to certain state net operating loss carryforwards.
We believe that it is likely that our Federal net operating loss carryforwards, included in our deferred tax assets, will be utilized in the 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 September 27, 2015, we had federal net operating loss carryforwards of approximately $36.5 million. As a result of the net deferred tax asset 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”) 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. Based on our initial enrollment experience in 2015, approximately 10% of our approximately 1,600 currently eligible hourly employees have opted for coverage under our medical plan. We estimate that our additional cost for health care coverage for our hourly employees, from the eligibility provisions of the Act, will range between $0.4 million and $0.5 million in 2015. In addition for 2015, we have incurred additional fee assessments under the Act of $0.9 million associated with our current health care coverage.

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Results of Operations
Three Months Ended September 27, 2015 Compared to Three Months Ended September 28, 2014
The following table sets forth, for the three months ended September 27, 2015 and September 28, 2014, selected operating results as a percentage of total restaurant sales:
 
Three Months Ended
 
September 27, 2015
 
September 28, 2014
Costs and expenses (all restaurants):
 
 
 
Cost of sales
27.9
%
 
30.7
%
Restaurant wages and related expenses
30.8
%
 
31.2
%
Restaurant rent expense
6.5
%
 
6.8
%
Other restaurant operating expenses
15.7
%
 
16.2
%
Advertising expense
3.8
%
 
3.8
%
General and administrative
5.4
%
 
5.6
%
Since the beginning of the third quarter of 2014, we have acquired 128 restaurants from other franchisees in six separate acquisitions. During the same period we closed 27 restaurants and sold one restaurant.
Restaurant Sales. Total restaurant sales in the third quarter of 2015 increased 21.1% to $217.7 million from $179.8 million in the third quarter of 2014 which included $39.4 million of sales from the 2014 and 2015 acquired restaurants. Comparable restaurant sales in the third quarter of 2015 increased 6.5% from effective promotions and included an increase in both customer traffic of 4.0% and average check of 2.5%. Year over year menu price increases in the third quarter of 2015 were approximately 2.2%. Comparable restaurant sales increased 5.7% at our legacy restaurants and increased 7.9% at our 2012 acquired restaurants.
Operating Costs and Expenses (percentages stated as a percentage of total restaurant sales). Cost of sales decreased to 27.9% in the third quarter of 2015 from 30.7% in the third quarter of 2014 due to lower overall commodity costs (1.9%) driven primarily from a 15.6% decrease in beef commodity costs compared to the prior year period. The reduction in cost of sales is also due to the effect of menu price increases (0.7%) and improvement in restaurant-level food and cash controls at our legacy and 2012 acquired restaurants partially offset by higher promotional discounting.
Restaurant wages and related expenses decreased to 30.8% in the third quarter of 2015 from 31.2% in the third quarter of 2014 primarily due to leveraging fixed labor costs from higher sales volumes and lower workers compensation claims (0.2%), partially offset by higher restaurant-level incentive bonus accruals.
Other restaurant operating expenses decreased to 15.7% in the third quarter of 2015 from 16.2% in the third quarter of 2014 due primarily to the effect of higher sales volumes on fixed operating costs, lower general liability insurance claims (0.2%) and lower utility costs (0.2%).
Advertising expense was 3.8% in both the third quarter of 2015 and the third quarter of 2014.
Restaurant rent expense decreased to 6.5% in the third quarter of 2015 from 6.8% in the third quarter of 2014 due in part to the closure of 27 restaurants with lower sales volumes since the beginning of the third quarter of 2014 and the effect of higher sales volumes in the third quarter of 2015 on fixed rental costs.
Restaurant-Level EBITDA. As a result of the factors above and the acquisition of 128 restaurants in 2014 and 2015, Restaurant-Level EBITDA increased $12.9 million, or 63.0%, to $33.3 million in the third quarter of 2015. For a reconciliation between Restaurant-Level EBITDA and income (loss) from operations see page 28.

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Table of Contents

 
 
Three Months Ended
 
 
September 27, 2015
 
% (1)
 
September 28, 2014
 
% (1)
Restaurant Sales:
 
 
 
 
 
 
 
 
Legacy restaurants
 
$
100,551

 
 
 
$
96,861

 
 
2012 acquired restaurants
 
77,692

 
 
 
75,180

 
 
2014 and 2015 acquired restaurants
 
39,433

 
 
 
7,781

 
 
Total
 
$
217,676

 
 
 
$
179,822

 
 
 
 
 
 
 
 
 
 
 
Restaurant-Level EBITDA:
 
 
 
 
 
 
 
 
Legacy restaurants
 
$
18,084

 
18.0
%
 
$
13,630

 
14.1
%
2012 acquired restaurants
 
10,681

 
13.7
%
 
6,014

 
8.0
%
2014 and 2015 acquired restaurants
 
4,564

 
11.6
%
 
808

 
10.4
%
Total
 
$
33,329

 
15.3
%
 
$
20,452

 
11.4
%
(1) Restaurant-Level EBITDA margin is calculated as a percentage of restaurant sales for each respective group of restaurants.
Restaurant-Level EBITDA margin increased 3.9% for our legacy restaurants due to lower commodity costs including beef, leveraging fixed operating costs from a comparable restaurant sales increase in the third quarter of 2015 of 5.7% and lower utility costs.
Restaurant-Level EBITDA margin increased 5.7% for our 2012 acquired restaurants due to similar factors as our legacy restaurants including leveraging higher sales volumes from a comparable restaurant sales increase of 7.9% in the third quarter of 2015, as well as the closure of 18 underperforming restaurants acquired in 2012 since the beginning of the third quarter of 2014 and the continued improvement in food and cash controls.
Restaurant-Level EBITDA margin for our 2014 and 2015 acquired restaurants increased 1.2% due primarily to lower commodity costs partially offset by higher repairs and maintenance expenses related to deferred maintenance prior to our ownership and higher utility costs. Restaurant-Level EBITDA margin for our 2014 and 2015 acquired restaurants is lower than our other restaurants due in part to the effect of lower average restaurants sales volumes on fixed operating costs.
General and Administrative Expenses. General and administrative expenses increased $1.7 million in the third quarter of 2015 to $11.8 million, and, as a percentage of total restaurant sales, decreased to 5.4% compared to 5.6% in the third quarter of 2014 due primarily to an increase of $1.5 million in administrative bonus accruals, additional district manager salaries, travel costs and restaurant manager training costs related primarily to the 2014 and 2015 acquisitions of $0.6 million, partially offset by lower legal fees of $0.3 million.
Adjusted EBITDA. As a result of the factors above, Adjusted EBITDA increased to $22.0 million in the third quarter of 2015 from $11.1 million in the third quarter of 2014. For a reconciliation between net income (loss) and EBITDA and Adjusted EBITDA see page 28.
Depreciation and Amortization Expense. Depreciation and amortization expense increased to $9.4 million in the third quarter of 2015 from $9.3 million in the third quarter of 2014 due primarily to our remodeling initiatives and the addition of our 2014 and 2015 acquisitions.
Impairment and Other Lease Charges. Impairment and other lease charges were $0.4 million in the third quarter of 2015 due to asset impairment charges relating to capital expenditures at previously impaired restaurants.
Interest Expense. Interest expense decreased to $4.5 million in the third quarter of 2015 from $4.7 million in the third quarter of 2014 due to our refinancing in the second quarter of 2015. The weighted average interest rate on our long-term debt, excluding lease financing obligations, was 8.00% in the third quarter of 2015 and 11.25% in the third quarter of 2014.


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Table of Contents

Income Taxes. Due to the valuation allowance on all of our deferred income tax assets discussed above, we did not record any provision for income taxes in the third quarter of 2015. The benefit for income taxes for the third quarter of 2014 was derived using an estimated effective annual income tax rate at that date for all of 2014 of 37.5%. In the fourth quarter of 2014, we recorded a valuation allowance on our all of our deferred income tax assets.
Net Income. As a result of the above, net income for the third quarter of 2015 was $7.2 million, or $0.16 per diluted share, compared to a net loss in the third quarter of 2014 of $1.7 million, or $0.05 per diluted share. The third quarter of 2014 included a benefit for income taxes of $2.6 million.
Nine Months Ended September 27, 2015 Compared to Nine Months Ended September 28, 2014
The following table sets forth, for the nine months ended September 27, 2015 and September 28, 2014, selected operating results as a percentage of total restaurant sales:
 
Nine Months Ended
 
September 27, 2015
 
September 28, 2014
Costs and expenses (all restaurants):
 
 
 
Cost of sales
28.3
%
 
29.7
%
Restaurant wages and related expenses
31.3
%
 
32.0
%
Restaurant rent expense
6.8
%
 
7.1
%
Other restaurant operating expenses
15.9
%
 
16.5
%
Advertising expense
3.7
%
 
4.1
%
General and administrative
5.8
%
 
5.8
%
Since the beginning of 2014 we have opened one new restaurant, which was relocated within its market area, and acquired 132 restaurants. During the same period we closed 35 restaurants, excluding the relocated restaurant, and sold one restaurant.
Restaurant Sales. Restaurant sales in the first nine months of 2015 increased 26.0% to $629.9 million from $499.9 million in the first nine months of 2014. The 2014 and 2015 acquired restaurants contributed restaurant sales of $110.8 million in the first nine months of 2015. Our comparable restaurant sales increased 8.4% due to an increase in customer traffic of 5.4% and an increase in average check of 3.0% including the effect of menu price increases in the first nine months of 2015 of 2.5%. Comparable restaurant sales in the first nine months of 2015 increased 7.3% at our legacy restaurants and increased 9.9% at our 2012 acquired restaurants.
Operating Costs and Expenses (percentages stated as a percentage of restaurant sales for the restaurants being discussed). Cost of sales decreased to 28.3% in the first nine months of 2015 from 29.7% in the first nine months of 2014 due to lower commodity costs (0.9%), which included a 1.8% decrease in beef costs compared to the prior year, the effect of menu price increases, and continued improvement in restaurant-level food and cash controls at our legacy and 2012 acquired restaurants (0.6%). These factors were partially offset by higher promotional discounting (0.4%) and lower vendor rebates (0.2%).
Restaurant wages and related expenses decreased to 31.3% in the first nine months of 2015 from 32.0% in the first nine months of 2014 due primarily to leveraging fixed labor costs from higher sales volumes (0.6%) and lower workers compensation claims (0.2%) partially offset by higher restaurant-level incentive bonus accruals.
Other restaurant operating expenses decreased to 15.9% in the first nine months of 2015 from 16.5% in the first nine months of 2014 due primarily to lower utility costs (0.2%) , lower general liability claims (0.2%) and the effect of higher sales volumes on fixed operating costs.
Advertising expense decreased to 3.7% in the first nine months of 2015 from 4.1% in the first nine months of 2014 due to reduced spending for additional local advertising in many of our markets. For all of 2015, we anticipate advertising expense for all restaurants to be approximately 3.8% of restaurant sales.

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Table of Contents

Restaurant rent expense decreased to 6.8% the first nine months of 2015 from 7.1% in the first nine months of 2014 due primarily to the closure of 35 restaurants with lower sales volumes since the beginning of 2014 and the effect of higher sales volumes in 2015 on fixed rental costs.
Restaurant-Level EBITDA. As a result of the factors above and the acquisition of 132 restaurants in 2014 and 2015, Restaurant-Level EBITDA increased 64.5% to $87.7 million in the first nine months of 2015 compared to $53.3 million in the first nine months of 2014. For a reconciliation between Restaurant-Level EBITDA and income (loss) from operations see page 28.
 
 
Nine Months Ended
 
 
September 27, 2015
 
% (1)
 
September 28, 2014
 
% (1)
Restaurant Sales:
 
 
 
 
 
 
 
 
Legacy restaurants
 
$
289,244

 
 
 
$
274,394

 
 
2012 acquired restaurants
 
229,894

 
 
 
216,880

 
 
2014 and 2015 acquired restaurants
 
110,810

 
 
 
8,584

 
 
Total
 
$
629,948

 
 
 
$
499,858

 
 
 
 
 
 
 
 
 
 
 
Restaurant-Level EBITDA:
 
 
 
 
 
 
 
 
Legacy restaurants
 
$
46,372

 
16.0
%
 
$
36,356

 
13.2
%
2012 acquired restaurants
 
30,092

 
13.1
%
 
16,136

 
7.4
%
2014 and 2015 acquired restaurants
 
11,268

 
10.2
%
 
842

 
9.8
%
Total
 
$
87,732

 
13.9
%
 
$
53,334

 
10.7
%
(1) Restaurant-Level EBITDA margin is calculated as a percentage of restaurant sales for each respective group of restaurants.
Restaurant-Level EBITDA margin increased 2.8% for our legacy restaurants due primarily to leveraging a comparable restaurant sales increase in the first nine months of 2015 of 7.3% on fixed operating costs and lower cost of sales (1.4%).
Restaurant-Level EBITDA margin increased 5.7% for our 2012 acquired restaurants due to leveraging a comparable restaurant sales increase of 9.9% in the first nine months of 2015 on fixed operating costs, lower cost of sales (1.6%) due in part to continued improvement in food and cash controls and the closure of 23 underperforming restaurants acquired in 2012 since the beginning of 2014.
Restaurant-Level EBITDA margin for our 2014 and 2015 acquired restaurants increased 0.4% due to lower cost of sales, including improvement in food and cash controls, substantially offset by higher repairs and maintenance expenses related to deferred maintenance prior to our ownership. Restaurant-Level EBITDA margin for our 2014 and 2015 acquired restaurants is lower than our other restaurants due in part to the effect of lower average restaurants sales volumes on fixed operating costs.
General and Administrative Expenses. General and administrative expenses increased $7.3 million in the first nine months of 2015 to $36.3 million and, as a percentage of total restaurant sales, was 5.8% in both 2015 and 2014. The increase in general and administrative expenses was due primarily to a $4.5 million increase in administrative bonus accruals and additional district manager salaries, travel costs and restaurant manager training costs related to the 2014 and 2015 acquisitions of $2.9 million.
Adjusted EBITDA. As a result of the factors above Adjusted EBITDA more than doubled to $53.0 million in the first nine months of 2015 from $26.0 million in the first nine months of 2014. For a reconciliation between net loss and EBITDA and Adjusted EBITDA see page 28.
Depreciation and Amortization. Depreciation and amortization expense increased to $29.2 million in the first nine months of 2015 from $27.1 million in the first nine months of 2014 due primarily to the 132 restaurants acquired since the beginning of 2014, as well as our restaurant remodeling initiatives in 2014 and 2015.

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Table of Contents

Impairment and Other Lease Charges. Impairment and other lease charges were $2.7 million in the first nine months of 2015 and were comprised of other lease charges of $1.5 million associated with the closure of ten restaurants and asset impairment charges of $1.2 million, including $1.0 million of capital expenditures at previously impaired restaurants.
Interest Expense. Total interest expense was $14.0 million in the first nine months of 2015 and $14.1 million in the first nine months of 2014. The weighted average interest rate on our long-term debt, excluding lease financing obligations, decreased to 9.27% in the first nine months of 2015 compared to 11.23% in the first nine months of 2014 as a result of the refinancing of our 11.25% Notes.
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 nine months of 2015. 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%. In the fourth quarter of 2014, we recorded a valuation allowance on our all of our deferred income tax assets.
Loss on Extinguishment of Debt. A loss on extinguishment of debt of $12.6 million was recorded in the second quarter of 2015 in connection with the refinancing of our 11.25% Notes. The loss on extinguishment of debt included the tender and redemption premium and other transaction costs associated with the repurchase and redemption of the 11.25% Notes of approximately $9.8 million and the write-off of $2.8 million of previously deferred financing costs related to the 11.25% Notes.
Net Loss. As a result of the foregoing, net loss for the first nine months of 2015 was $7.0 million, or $0.20 per diluted share, compared to a net loss in the first nine months of 2014 of $11.1 million, or $0.37 per diluted share. The first nine months of 2014 included a benefit for income taxes of $7.6 million.

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Table of Contents

Reconciliations of EBITDA and Adjusted EBITDA to net income (loss) and Restaurant-Level EBITDA to income (loss) from operations are as follows:
 
Three Months Ended
 
Nine Months Ended
Reconciliation of EBITDA and Adjusted EBITDA:
September 27, 2015
 
September 28, 2014
 
September 27, 2015
 
September 28, 2014
Net income (loss)
$
7,239

 
$
(1,721
)
 
$
(7,014
)
 
$
(11,082
)
Benefit for income taxes

 
(2,632
)
 

 
(7,555
)
Interest expense
4,512

 
4,683

 
14,026

 
14,080

Depreciation and amortization
9,418

 
9,318

 
29,216

 
27,121

EBITDA
21,169

 
9,648

 
36,228

 
22,564

Impairment and other lease charges
396

 
773

 
2,732

 
1,822

Acquisition costs (1)
79

 
412

 
339

 
686

Stock-based compensation expense
367

 
296

 
1,071

 
883

Loss on extinguishment of debt

 

 
12,635

 

Adjusted EBITDA
$
22,011

 
$
11,129

 
$
53,005

 
$
25,955

Reconciliation of Restaurant-Level EBITDA:
 
 
 
 
 
 
 
Restaurant-Level EBITDA
$
33,329

 
$
20,452

 
$
87,732

 
$
53,334

Less:
 
 
 
 
 
 
 
General and administrative expenses
11,764

 
10,031

 
36,263

 
28,923

Depreciation and amortization
9,418

 
9,318

 
29,216

 
27,121

Impairment and other lease charges
396


773

 
2,732

 
1,822

Other expense (income)



 
(126
)
 
25

Income (loss) from operations
$
11,751

 
$
330

 
$
19,647

 
$
(4,557
)
(1)
Acquisition costs for the periods presented include primarily legal and professional fees incurred in connection with the 2014 and 2015 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 are paid.
On April 29, 2015, we issued $200 million of 8% Notes and used a portion of the net proceeds to repurchase and redeem all of our outstanding 11.25% Notes tendered pursuant to a cash tender offer and redemption and to pay related fees and expenses. We received net proceeds of approximately $35.2 million which are being used for working capital and general corporate purposes, capital expenditures to remodel our restaurants and Burger King restaurant acquisitions.
On April 29, 2015, we entered into an amendment to our 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 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). At September 27, 2015 our LIBOR rate margin was 3.50% based on our Adjusted Leverage Ratio at that date.

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Table of Contents

Interest payments under our debt obligations, capital expenditures, including our commitments to BKC to remodel restaurants in 2015 and 2016, 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 that cash generated from the sale of the 8% Notes on April 29, 2015, cash generated from our operations and availability of revolving credit borrowings under our senior credit facility will provide sufficient cash availability to cover our anticipated working capital needs, capital expenditures and debt service requirements for the next twelve months.
Operating Activities. Net cash provided from operating activities in the first nine months of 2015 increased $44.7 million to $55.6 million from $10.9 million in the first nine months of 2014. The increase was due primarily to an increase in Adjusted EBITDA of $27.1 million and cash provided from changes in the components of net working capital of $17.8 million.
Investing Activities. Net cash used for investing activities in the first nine months of 2015 and 2014 was $39.1 million and $42.5 million, respectively.
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 commitments 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 initiatives; and (4) corporate and restaurant information systems, including expenditures for our point-of-sale software for restaurants that we acquire.
The following table sets forth our capital expenditures for the periods presented (in thousands):
Nine Months Ended September 27, 2015
 
 
New restaurant development
 
$
556

Restaurant remodeling
 
27,807

Other restaurant capital expenditures
 
7,367

Corporate and restaurant information systems
 
1,801

Total capital expenditures
 
$
37,531

 
 
 
Nine Months Ended September 28, 2014
 
 
New restaurant development
 
$
1,661

Restaurant remodeling
 
23,345

Other restaurant capital expenditures
 
4,533

Corporate and restaurant information systems
 
3,173

Total capital expenditures
 
$
32,712

  ____________
Investing activities in the first nine months of 2015 also included $3.6 million for the purchase of three leased restaurant properties to be sold in sale-leaseback transactions. Total net proceeds from sale-leaseback transactions of three restaurant properties in the first nine months of 2015 were $3.1 million.
Investing activities in the first nine months of 2014 also included $3.4 million for the purchase of three leased restaurant properties to be sold in sale-leaseback transactions. Total net proceeds from sale-leaseback transactions of five restaurant properties in the first nine months of 2014 were $6.6 million.
Financing Activities. Net cash provided by financing activities in the first nine months of 2015 was $34.1 million due primarily to the refinancing in the second quarter discussed above. Net cash provided by financing activities in the first nine months of 2014 was $66.6 million due primarily to a public offering of our common stock completed in the second quarter of 2014 which generated cash proceeds of $67.3 million, net of related expenses.

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8% Senior Secured Second Lien Notes. The 8% Notes mature and are payable on May 1, 2022. Interest is payable semi-annually on May 1 and November 1 commencing November 1, 2015. The 8% Notes are guaranteed jointly and severally by our subsidiaries and are secured by second-priority liens on substantially all of our and our subsidiaries' assets (including a pledge of all of the capital stock and equity interests of our subsidiaries).
The 8% Notes are redeemable at our option in whole or in part at any time after May 1, 2018 at a price of 104% of the principal amount plus accrued and unpaid interest, if any, if redeemed before May 1, 2019, 102% of the principal amount plus accrued and unpaid interest, if any, if redeemed after May 1, 2019 but before May 1, 2020 and 100% of the principal amount plus accrued and unpaid interest, if any, if redeemed after May 1, 2020. Prior to May 1, 2018, we may redeem some or all of the 8% 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 8% Notes also provides that we may redeem up to 35% of the 8% Notes using the proceeds of certain equity offerings completed before May 1, 2018.
The 8% Notes are jointly and severally guaranteed, unconditionally and in full by our 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 8% 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 8% 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 8% Notes then outstanding.
The indenture governing the 8% Notes contains customary default provisions, including without limitation, a cross default provision pursuant to which it is an event of default under the 8% Notes and the indenture governing the 8% Notes if there is a default under any of our indebtedness having an outstanding principal amount of $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 27, 2015 with the restrictive covenants of the indenture governing the 8% Notes.
Senior Credit Facility. 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, the Adjusted Leverage Ratio and the First Lien Coverage Ratio, all as defined under the amended senior credit facility. We were in compliance as of September 27, 2015 with the covenants of the amended senior credit facility.
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,

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payment default, covenant defaults, bankruptcy type defaults, cross-defaults on other indebtedness, judgments or upon the occurrence of a change of control.
At September 27, 2015 there were no revolving credit borrowings outstanding under the senior credit facility. After reserving $12.0 million for letters of credit issued under the senior credit facility for workers’ compensation and other insurance policies, $18.0 million was available for revolving credit borrowings at September 27, 2015.
Contractual Obligations
A table of our contractual obligations as of June 28, 2015 was included in Item 2, “Management's Discussion and Analysis of Financial Condition and Results of Operations” of our Quarterly Report on Form 10-Q for the quarterly period ended June 28, 2015. There have been no significant changes to our contractual obligations during the three months ending September 27, 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, state and local hourly minimum wage rates. Accordingly, changes in the Federal, state or local 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 contained in this Quarterly Report on Form 10-Q 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 28, 2014. Critical accounting estimates are those that require application of management’s most difficult, subjective or complex judgments, often as a result of matters that are inherently uncertain and may change in subsequent periods. There have been no material changes affecting our critical accounting policies previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 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 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 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 28, 2014 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 and nine months ended September 27, 2015 and a nominal change to interest expense for the three and nine months ended September 28, 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 27, 2015.
No change occurred in our internal control over financial reporting during the third quarter of 2015 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II—OTHER INFORMATION
Item 1.    Legal Proceedings
None
Item 1A. Risk Factors
Part I-Item 1A of Annual Report on Form 10-K for the fiscal year ended December 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 for the fiscal year ended December 28, 2014.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Mine Safety Disclosures
Not applicable

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Item 5. Other Information
None
Item 6. Exhibits
(a)The following exhibits are filed as part of this report.
Exhibit No.
 
  
31.1
 
Chief Executive Officer’s Certificate Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for 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 4, 2015
/s/ Daniel T. Accordino
 
(Signature)
 
Daniel T. Accordino
Chief Executive Officer
 
 
Date: November 4, 2015
/s/ Paul R. Flanders
 
(Signature)
 
Paul R. Flanders
Vice President – Chief Financial Officer and Treasurer

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