July 1, 2012 Current assets: Cash and cash equivalents Trade and other receivables Inventories Prepaid rent Prepaid expenses and other current assets Refundable income taxes Deferred income taxes Total current assets Property and equipment, net Franchise rights, net (Note 4) Goodwill (Note 4) Intangible assets, net Franchise agreements, at cost less accumulated amortization of $6,447 and $6,102 respectively Deferred income taxes Other assets Total assets Current liabilities: Current portion of long-term debt (Note 5) Accounts payable Accrued interest Accrued payroll, related taxes and benefits Accrued income taxes payable Accrued real estate taxes Other liabilities Total current liabilities Long-term debt, net of current portion (Note 5) Lease financing obligations (Note 9) Deferred income—sale-leaseback of real estate Accrued postretirement benefits (Note 8) Deferred income taxes Other liabilities (Note 7) Total liabilities Commitments and contingencies (Note 11) Stockholders’ equity: Preferred stock, par value $.01; authorized 20,000,000 shares, issued and outstanding—none Voting common stock, par value $.01; authorized 100,000,000 shares, issued and outstanding—22,088,900 and 21,678,203 shares, respectively Additional paid-in capital Retained earnings Accumulated other comprehensive income (Note 13) Treasury stock, at cost Total stockholders’ equity Total liabilities and stockholders’ equity AND COMPREHENSIVE INCOME (LOSS) Revenues: Restaurant sales Franchise royalty revenues and fees Total revenues Costs and expenses: Cost of sales Restaurant wages and related expenses (including stock-based compensation expense of $6, $21, $27 and $49, respectively) Restaurant rent expense Other restaurant operating expenses Advertising expense General and administrative (including stock-based compensation expense of $714, $402, $2,091 and $1,183, respectively) Depreciation and amortization Impairment and other lease charges (Note 3) Other expense (income) (Note 14) Total operating expenses Income from operations Interest expense Loss on extinguishment of debt (Note 5) Income before income taxes Provision for income taxes (Note 6) Net income Basic net income per share (Note 12) Diluted net income per share (Note 12) Basic weighted average common shares outstanding (Note 12) Diluted weighted average common shares outstanding (Note 12) CHANGES IN STOCKHOLDERS' EQUITY Cash flows provided from operating activities: Net income Adjustments to reconcile net income to net cash provided from operating activities: Loss on disposals of property and equipment Stock-based compensation expense Impairment and other lease charges Depreciation and amortization Amortization of deferred financing costs Amortization of deferred gains from sale-leaseback transactions Accretion of interest on lease financing obligations Deferred income taxes Accrued income taxes Loss on extinguishment of debt Changes in other operating assets and liabilities Net cash provided from operating activities Cash flows used for investing activities: Capital expenditures: New restaurant development Restaurant remodeling Other restaurant capital expenditures Corporate and restaurant information systems Total capital expenditures Properties purchased for sale-leaseback Proceeds from sale-leaseback transactions Proceeds from sales of properties Net cash used for investing activities Cash flows provided from (used for) financing activities: Borrowings on prior revolving credit facility Repayments on prior revolving credit facility Term loan borrowings from new Carrols LLC credit facility Proceeds from issuance of Fiesta Restaurant Group senior secured second lien notes Repayments of term loans under prior credit facility Repayments of prior Carrols senior subordinated notes Principal pre-payments on term loans Scheduled principal payments on term loans under prior credit facility Principal payments on capital leases Proceeds from lease financing obligations Financing costs associated with issuance of lease financing obligations Financing costs associated with issuance of debt Proceeds from stock option exercises Net cash provided from (used for) financing activities Net increase (decrease) in cash and cash equivalents Cash and cash equivalents, beginning of period Cash and cash equivalents, end of period Supplemental disclosures: Interest paid on long-term debt Interest paid on lease financing obligations Accruals for capital expenditures Income tax (refunds) payments, net Capital lease obligations incurred Non-cash reduction of lease financing obligations On periods presented. See Note 3—Discontinued Operations for further information. 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 our own assumptions. The following methods were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate the fair value: Use of Estimates.The preparation of the 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 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, stock options. (Continued) Options outstanding at January 1, 2011 Granted Exercised Forfeited Options outstanding at September 30, 2011 Vested or expected to vest at September 30, 2011 Options exercisable at September 30, 2011 Nonvested at January 1, 2011 Granted Vested Forfeited Nonvested at September 30, 2011 Burger King Pollo Tropical Taco Cabana During the three and six months ended Balance, September 30, 2011 per share amounts) Collateralized: Carrols LLC Credit Facility-Term loan Prior Carrols Senior Credit Facility-Term loan Fiesta Restaurant Group 8.875% Senior Secured Second Lien Notes Unsecured: Carrols 9% Senior Subordinated Notes Capital leases Less: current portion the combined guarantors. aggregate principal amount of the Notes then outstanding. Current Deferred Accrued occupancy costs Accrued workers’ compensation costs Deferred compensation Other Balance, beginning of period Accruals for additional lease charges Payments, net Other adjustments Balance, end of period Distribution Agreement. (Continued) Service cost Interest cost Amortization of net gains and losses Amortization of prior service credit Net periodic postretirement benefit income future. The Company has Three Months Ended September 30, 2011: Total revenues Cost of sales Restaurant wages and related expenses Restaurant rent expenses General and administrative expenses (1) Depreciation and amortization Adjusted Segment EBITDA Capital expenditures, including acquisitions September 30, 2010: Total revenues Cost of sales Restaurant wages and related expenses Restaurant rent expenses General and administrative expenses (1) Depreciation and amortization Adjusted Segment EBITDA Capital expenditures, including acquisitions Nine Months Ended September 30, 2011: Total revenues Cost of sales Restaurant wages and related expenses Restaurant rent expenses General and administrative expenses (1) Depreciation and amortization Adjusted Segment EBITDA Capital expenditures, including acquisitions September 30, 2010: Total revenues Cost of sales Restaurant wages and related expenses Restaurant rent expenses General and administrative expenses (1) Depreciation and amortization Adjusted Segment EBITDA Capital expenditures, including acquisitions Identifiable Assets: At September 30, 2011 At December 31, 2010 Adjusted Segment EBITDA: Pollo Tropical Taco Cabana Burger King Less: Depreciation and amortization Impairment and other lease charges Interest expense Provision for income taxes Stock-based compensation expense Loss on extinguishment of debt Other expense (income) Net income guarantees or direct obligations. the issuance and rank senior to Carrols Common Stock with respect to rights on liquidation, winding-up and dissolution of Carrols Restaurant Group. The Preferred Stock is perpetual and will receive any dividends and amounts upon a liquidation event on an as converted basis, without regard to the issuance limitation, does not (Continued) Basic net income per share: Net income Weighted average common shares outstanding Basic net income per share Diluted net income per share: Net income for diluted net income per share Shares used in computed basic net income per share Dilutive effect of non-vested shares and stock options Shares used in computed diluted net income per share Diluted net income per share Shares excluded from diluted net income per share computation (1) Net income Change in postretirement benefit obligation, net of tax Comprehensive income 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 MD&A is written to help the reader understand our company. The MD&A is provided as a supplement to, and should be read in conjunction with our Consolidated Financial Statements and the accompanying financial statement notes appearing elsewhere in this report and our Annual Report on Form 10-K for the year ended Operating Results continuing Burger King restaurant operations. May 30, 2012, we completed the acquisition of 278 of BKC company-owned Burger King restaurants, which we refer to as the "acquisition", for a purchase price consisting of (i) a 28.9% equity ownership interest (subject to the issuance limitation described below), (ii) $3.8 million for cash on hand and inventory at the acquired restaurants and (iii) $9.4 million of franchise fees and $3.8 million for BKC’s assignment of its right of first refusal on franchisee restaurant transfers in 20 states ("ROFR") pursuant to an Operating Agreement, which we refer to as the "operating agreement", dated as of May 30, 2012 with BKC. The amount for the ROFR is payable in quarterly payments over five years and the first quarterly payment of $0.2 million was made at closing. We also entered into new franchise agreements pursuant to the purchase and operating agreements and entered into leases with BKC for all of the acquired restaurants, including leases for 81 restaurants owned in fee by BKC and subleases for 197 restaurants under terms substantially the same as BKC’s underlying leases for those properties. Pursuant to the operating agreement, we also agreed to remodel 455 Burger King restaurants to BKC’s 20/20 restaurant image, including 57 restaurants in 2012, 154 restaurants in 2013, 154 restaurants in 2014 and 90 restaurants in 2015. The Series A Convertible Preferred Stock, which we refer to as the "Series A Preferred Stock", issued to BKC is subject to restrictions limiting the conversion of the Series A Preferred Stock to an amount of shares not to exceed 19.9% of the outstanding shares of our common stock as of the date of issuance (the “issuance limitation”). Pursuant to the purchase agreement, the removal of the issuance limitation is subject to obtaining the approval of our stockholders at our 2012 annual meeting or at subsequent meetings, if necessary, until stockholder approval is obtained. common stock held. As a result of the discontinued operations for all periods presented. July 3, 2011 Restaurant sales: Pollo Tropical Taco Cabana Burger King Total restaurant sales Costs and expenses: Cost of sales Restaurant wages and related expenses Restaurant rent expense Other restaurant operating expenses Advertising expense General and administrative sales for all of our restaurants, our legacy restaurants and the acquired restaurants: from BKC. 2012 we opened two restaurants, one of which was relocated within its market area, and closed, excluding the relocated restaurant, ten restaurants. restaurant sales due to our commitment to BKC, as part of the purchase agreement, to begin spending 0.75% of restaurant sales for additional local advertising in markets that approve such additional spending in the second half of 2012. legal fees related to our outstanding litigation with the EEOC. 2011. Restaurant sales: Pollo Tropical Taco Cabana Burger King Total restaurant sales Costs and expenses: Cost of sales Restaurant wages and related expenses Restaurant rent expense Other restaurant operating expenses Advertising expense General and administrative (loss) from continuing operations is as follows: restaurant operations are primarily conducted on a cash basis; rapid turnover results in a limited investment in inventories; and cash from sales is usually received before related liabilities for food, supplies and payroll become due. acquisition of the acquired restaurants, to pay $4.5 million for fees and expenses related to the offering of the Notes paid at closing and to fund a $20.0 million cash collateral account required under our new senior credit facility discussed below. The remainder of the proceeds of $48.7 million will be used together with anticipated operating cash flow and the cash collateral account, when it becomes unrestricted, to fund the restaurant remodeling obligations committed to in connection with the acquisition and to fund future payments to BKC for the ROFR acquired in the acquisition. Nine Months Ended September 30, 2011 New restaurant development Restaurant remodeling Other restaurant capital expenditures (1) Corporate and restaurant information systems Total capital expenditures Number of new restaurant openings (2) Nine Months Ended September 30, 2010 New restaurant development Restaurant remodeling Other restaurant capital expenditures (1) Corporate and restaurant information systems Total capital expenditures Number of new restaurant openings (2) legacy restaurants in the first six months of 2012 . obtain funds from its respective subsidiaries. the Notes in 2012. Contractual Obligations Long-term debt obligations, including interest (1) Capital lease obligations, including interest (2) Operating lease obligations (3) Lease financing obligations, including interest (4) Total contractual obligations 31, 2012. January 1, 2012, as amended: sensitive instruments. July 1, 2012. 1, 2012 Date: x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 October 2, 2011¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 Delaware Delaware 16-1287774 (I.R.S. EmployerIdentification No.)13203 (Address of principal executive office) (Zip Code) xý No ¨their Corporateits 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 xý No ¨Large accelerated filer ¨o Accelerated filer x Non-accelerated filer ¨o Smaller reporting company ¨o(Do not check if smaller reporting company) xýNovember 7, 2011,August 3, 2012, Carrols Restaurant Group, Inc. had 22,102,20123,677,820 shares of its common stock, $.01 par value, outstanding.OCTOBER 2, 2011JULY 1, 2012 Page Item 1 3 4 5 6Item 2 19Item 3 33Item 4 33 Item 1 33Item 1A 33Item 2 34Item 3 34Item 4 34Item 5 34Item 6 34 (UNAUDITED)share and per share amounts) September 30,
2011 December 31,
2010 ASSETS $ 22,232 $ 3,144 6,990 5,213 5,081 5,203 4,081 4,018 6,375 5,349 — 869 4,441 4,609 49,200 28,405 189,117 186,850 68,366 70,432 124,934 124,934 — 419 5,297 5,629 — 1,949 15,142 7,684 $ 452,056 $ 426,302 LIABILITIES AND STOCKHOLDERS’ EQUITY $ 6,552 $ 15,538 15,496 13,944 2,940 6,853 20,228 19,504 265 — 5,837 4,778 9,855 7,434 61,173 68,051 259,605 237,914 10,063 10,061 38,290 40,472 1,611 1,845 1,347 — 21,509 23,052 393,598 381,395 — — 216 216 5,866 3,474 50,982 39,823 1,535 1,535 (141 ) (141 ) 58,458 44,907 $ 452,056 $ 426,302 July 1,
2012 January 1,
2012ASSETS Current assets: Cash $ 58,048 $ 24,661 Trade and other receivables 4,121 6,673 Inventories 6,941 5,601 Prepaid rent 3,007 4,077 Prepaid expenses and other current assets 3,328 5,522 Refundable income taxes 2,554 2,239 Deferred income taxes 3,106 3,484 Total current assets 81,105 52,257 Restricted cash (Note 7) 20,000 — Property and equipment, net 123,981 190,310 Franchise rights, net (Note 6) 100,110 67,238 Goodwill (Note 6) 1,450 124,934 Franchise agreements, at cost less accumulated amortization of $6,703 and $6,504, respectively 14,348 5,225 Deferred financing fees 5,404 8,670 Other assets 3,103 9,758 Total assets $ 349,501 $ 458,392 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Current portion of long-term debt (Note 7) $ 1,028 $ 6,553 Accounts payable 15,069 14,759 Accrued interest 1,641 7,178 Accrued payroll, related taxes and benefits 12,538 21,796 Accrued real estate taxes 3,513 4,812 Other liabilities 8,646 8,779 Total current liabilities 42,435 63,877 Long-term debt, net of current portion (Note 7) 159,899 261,966 Lease financing obligations 1,195 10,064 Deferred income—sale-leaseback of real estate 18,810 37,372 Deferred income taxes 7,609 2,234 Accrued postretirement benefits 1,862 2,055 Other liabilities (Note 9) 11,760 21,667 Total liabilities 243,570 399,235 Commitments and contingencies (Note 10) Stockholders’ equity: Preferred stock, par value $.01; authorized 20,000,000 shares, issued and outstanding—100 shares and zero, respectively (Note 12) — — Voting common stock, par value $.01; authorized—100,000,000 shares, issued—23,176,920 and 22,135,663 shares, respectively, and outstanding—22,742,011 and 21,750,237 shares, respectively 227 218 Additional paid-in capital 67,298 6,954 Retained earnings 37,394 51,041 Accumulated other comprehensive income 1,153 1,085 Treasury stock, at cost (141 ) (141 ) Total stockholders’ equity 105,931 59,157 Total liabilities and stockholders’ equity $ 349,501 $ 458,392 NINESIX MONTHS ENDED SEPTEMBER 30,JULY 1, 2012 AND JULY 3, 2011 AND 2010share and per share amounts) Three months ended
September 30, Nine months ended
September 30, 2011 2010 2011 2010 $ 211,380 $ 201,272 $ 617,596 $ 600,080 376 353 1,242 1,165 211,756 201,625 618,838 601,245 65,701 60,093 192,188 182,260 60,163 59,027 178,963 177,772 12,265 12,035 36,527 36,623 30,290 29,649 87,253 86,986 8,270 8,856 23,245 23,460 13,702 12,022 41,307 37,196 8,246 8,080 24,743 24,315 (11 ) 191 2,044 4,092 105 (400 ) (343 ) (400 ) 198,731 189,553 585,927 572,304 13,025 12,072 32,911 28,941 5,757 4,693 14,949 14,144 2,449 — 2,449 — 4,819 7,379 15,513 14,797 1,414 2,786 4,354 5,455 $ 3,405 $ 4,593 $ 11,159 $ 9,342 $ 0.16 $ 0.21 $ 0.52 $ 0.43 $ 0.15 $ 0.21 $ 0.50 $ 0.43 21,690,753 21,623,221 21,665,551 21,618,624 22,232,539 21,777,325 22,153,603 21,819,696 Three Months Ended Six Months Ended July 1, 2012 July 3, 2011 July 1, 2012 July 3, 2011 Revenues: — Restaurant sales $ 122,104 $ 88,595 $ 207,554 $ 170,217 Costs and expenses: Cost of sales 38,877 26,497 64,999 50,468 Restaurant wages and related expenses 37,446 27,457 65,314 54,387 Restaurant rent expense 7,979 5,692 13,662 11,402 Other restaurant operating expenses 18,221 13,295 31,864 26,476 Advertising expense 4,604 3,698 7,300 7,082 General and administrative (including stock-based compensation expense of $177, $266, $279 and $522, respectively) 8,081 4,880 14,279 9,975 Depreciation and amortization 6,346 3,959 11,039 7,788 Impairment and other lease charges (Note 5) 101 155 127 971 Other income — (342 ) — (448 ) Total operating expenses 121,655 85,291 208,584 168,101 Income (loss) from operations 449 3,304 (1,030 ) 2,116 Interest expense 2,640 2,328 3,555 4,689 Loss on extinguishment of debt 1,509 — 1,509 — Income (loss) from continuing operations before income taxes (3,700 ) 976 (6,094 ) (2,573 ) Provision (benefit) for income taxes (Note 8) (2,782 ) 676 (2,273 ) (2,041 ) Net income (loss) from continuing operations (918 ) 300 (3,821 ) (532 ) Income from discontinued operations, net of income taxes 668 5,208 44 8,286 Net income (loss) $ (250 ) $ 5,508 $ (3,777 ) $ 7,754 Basic net income (loss) per share (Note 13): Continuing operations $ (0.04 ) $ 0.01 $ (0.17 ) $ (0.02 ) Discontinued operations $ 0.03 $ 0.24 $ 0.00 $ 0.38 Diluted net income (loss) per share (Note 13): Continuing operations $ (0.04 ) $ 0.01 $ (0.17 ) $ (0.02 ) Discontinued operations $ 0.03 $ 0.24 $ 0.00 $ 0.38 Shares used in computing net income (loss) per share: Basic weighted average common shares outstanding 22,742,257 21,663,181 22,413,285 21,652,950 Diluted weighted average common shares outstanding 22,742,257 22,160,514 22,413,285 21,652,950 Other comprehensive income (loss), net of tax: Net income (loss) $ (250 ) $ 5,508 $ (3,777 ) $ 7,754 Change in valuation of interest rate swap, net of tax expense of $68 and $42, respectively 106 — 68 — Comprehensive income (loss) $ (144 ) $ 5,508 $ (3,709 ) $ 7,754 CASH FLOWSNINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010 2011 2010 $ 11,159 $ 9,342 197 525 2,118 1,232 2,044 4,092 24,743 24,315 860 713 (2,482 ) (2,510 ) 6 47 3,464 248 1,134 1,615 1,455 — (4,386 ) (8,985 ) 40,312 30,634 (11,626 ) (9,783 ) (9,685 ) (8,572 ) (8,342 ) (6,995 ) (3,214 ) (962 ) (32,867 ) (26,312 ) (2,058 ) (3,695 ) 7,783 5,891 572 — (26,570 ) (24,116 ) 32,700 96,300 (32,700 ) (94,000 ) 65,000 — 200,000 — (80,214 ) — (165,000 ) — — (1,023 ) (7,036 ) (8,912 ) (44 ) (61 ) 1,736 — (89 ) — (9,278 ) — 271 33 5,346 (7,663 ) 19,088 (1,145 ) 3,144 4,402 $ 22,232 $ 3,257 $ 17,232 $ 16,419 $ 763 $ 685 $ 1,569 $ 530 $ (242 ) $ 3,564 $ — $ 123 $ 1,740 $ — Common Voting Additional Other Total Stock Preferred Common Paid-In Retained Comprehensive Treasury Stockholders' Shares Stock Stock Capital Earnings Income Stock Equity Balance at January 2, 2011 21,632,402 $ — $ 216 $ 3,474 $ 39,823 $ 1,535 $ (141 ) $ 44,907 Stock-based compensation — — — 2,779 — — — 2,779 Exercise of stock options 97,376 — 1 550 — — — 551 Vesting of non-vested shares and excess tax benefits 20,459 — 1 151 — — — 152 Net income — — — — 11,218 — — 11,218 Change in valuation of interest rate swap — — — — — (68 ) — (68 ) Change in postretirement benefit obligations — — — — — (382 ) — (382 ) Balance at January 1, 2012 21,750,237 $ — 218 6,954 51,041 1,085 (141 ) 59,157 Stock-based compensation — $ — — 1,522 — — — 1,522 Exercise of stock options 69,824 — — 295 — — — 295 Conversion of stock options 666,090 — 7 (7 ) — — — — Vesting of non-vested shares and excess tax benefits 255,860 — 2 823 — — — 825 Issuance of preferred stock (Note 12) — — — 57,711 — — — 57,711 Distribution of Fiesta Restaurant Group (Note 3) — — — — (9,870 ) — — (9,870 ) Net loss for the six months ended July 1, 2012 — — — — (3,777 ) — — (3,777 ) Change in valuation of interest rate swap — — — — — 68 — 68 Balance at July 1, 2012 22,742,011 $ — $ 227 $ 67,298 $ 37,394 $ 1,153 $ (141 ) $ 105,931 2012 2011 Cash flows provided from (used for) operating activities from continuing operations: Net income (loss) $ (3,777 ) $ 7,754 Income from discontinued operations (44 ) (8,286 ) Adjustments to reconcile net income (loss) to net cash provided from operating activities of continuing operations: Loss (gain) on disposals of property and equipment 9 (250 ) Stock-based compensation 279 522 Impairment and other lease charges 127 971 Depreciation and amortization 11,039 7,788 Amortization of deferred financing costs 278 459 Amortization of deferred gains from sale-leaseback transactions (882 ) (918 ) Accretion of interest on lease financing obligations 2 2 Deferred income taxes (2,099 ) 2,182 Loss on extinguishment of debt 1,509 — Changes in other operating assets and liabilities 11,846 5,901 Net cash provided from operating activities of continuing operations 18,287 16,125 Cash flows used for investing activities of continuing operations: Capital expenditures: New restaurant development — (1,572 ) Restaurant remodeling (6,556 ) (3,497 ) Other restaurant capital expenditures (2,015 ) (2,169 ) Corporate and restaurant information systems (8,717 ) (1,431 ) Total capital expenditures (17,288 ) (8,669 ) Acquisition of restaurants from BKC, net of cash acquired (12,135 ) — Increase in restricted cash balance (20,000 ) — Proceeds from sales of other restaurant properties 2,082 572 Net cash used for investing activities of continuing operations (47,341 ) (8,097 ) Cash flows provided from (used for) financing activities of continuing operations: Proceeds from issuance of senior secured second lien notes 150,000 — Cash of Fiesta Restaurant Group deconsolidated as a result of spin-off (5,490 ) (5,704 ) Borrowings on previous revolving credit facilities 19,200 32,700 Repayments on previous revolving credit facilities (23,200 ) (32,700 ) Repayments of term loans under prior credit facility (61,750 ) — Principal payments on term loans under prior credit facilities (1,625 ) (7,036 ) Capital contribution to Fiesta Restaurant Group (2,500 ) — Principal payments on capital leases (81 ) (5 ) Excess tax benefits from stock-based compensation 825 — Financing costs associated with issuance of debt (5,378 ) — Proceeds from stock option exercises 295 185 Net cash provided from (used for) financing activities of continuing operations 70,296 (12,560 ) Net increase in cash from continuing operations 41,242 (4,532 ) Net cash provided from operating activities of discontinued operations 3,834 9,188 Net cash used for investing activities of discontinued operations (15,007 ) (6,990 ) Net cash provided from financing activities of discontinued operations 3,318 923 Net increase (decrease) in cash from discontinued operations (7,855 ) 3,121 Net increase in cash 33,387 (1,411 ) Cash, beginning of period 24,661 3,144 Cash, end of period $ 58,048 $ 1,733 Supplemental disclosures: Interest paid on long-term debt $ 8,508 $ 8,184 Interest paid on lease financing obligations $ 52 $ 51 Accruals for capital expenditures $ 839 $ 242 Income taxes paid (refunded ), net $ 4 $ (515 ) Capital lease obligations incurred $ 10,870 $ — October 2, 2011July 1, 2012 Carrols Restaurant Group, Inc. ("Carrols Restaurant Group" or the Company"Company") operated, as franchisee, 302574 restaurants under the trade name “Burger King” in 1213 Northeastern, Midwestern and Southeastern states. At October 2, 2011, the Company also owned and operated 91 Pollo Tropical restaurants, of which 85 were located in Florida, one was located in Georgia and five were located in New Jersey, and franchised a total of 30 Pollo Tropical restaurants, 21 in Puerto Rico, two in Ecuador, one in Honduras, one in the Bahamas, one in Trinidad, one in Venezuela and three on college campuses in Florida, and 158 Taco Cabana restaurants located primarily in Texas and franchised two Taco Cabana restaurants in New Mexico, two in Texas and one in Georgia. Inc. (“Carrols Restaurant Group” or the “Company”) is a holding company and conducts all of its operations through Carrols Corporation (“Carrols”) and its wholly-owned subsidiaries.The unaudited consolidated financial statements presented herein include the accounts of Carrols Restaurant Group and its wholly-owned subsidiary Carrols. In April 2011, Fiesta Restaurant Group, Inc. (“Fiesta Restaurant Group”), a wholly owned subsidiary of Carrols Corporation, was incorporated. In May 2011, Carrols contributed all of the outstanding capital stock of Pollo Operations, Inc. and Pollo Franchise Inc. (collectively “Pollo Tropical”) and Taco Cabana Inc. and subsidiaries (collectively (“Taco Cabana”) to Fiesta Restaurant Group, Inc. in exchange for all of the outstanding capital stock of Fiesta Restaurant Group. Any reference to “Carrols LLC” refers to Carrols’ wholly-owned subsidiary, Carrols LLC, a Delaware limited liability company.February 24, 2011,May 30, 2012, the Company announced its intention to split its business into two separate, publicly-traded companies throughcompleted the tax-freeacquisition of 278 of Burger King Corporation's ("BKC") company-owned Burger King® restaurants located in Ohio, Indiana, Kentucky, Pennsylvania, North Carolina, South Carolina and Virginia (the "acquired restaurants"). See Note 2—Acquisition for further information.its stockholders. If the spin-off is consummated, Fiestashareholders of Carrols Restaurant Group will ownof all of the outstanding shares of Fiesta's common stock (the "Spin-off"). As a result of the Spin-off, the results of operation and operatecash flows of Fiesta (including the Pollo Tropical and Taco Cabana businesses and the Company, Carrols and Carrols LLC will continue to own and operate its franchised Burger King restaurants. In the spin-off, it is anticipated thatsegments) have been presented as discontinued operations for all shares of Fiesta Restaurant Group common stock, which are currently held by Carrols, will be distributed in the form of a pro rata dividend to the stockholders of Carrols Restaurant Group.52-5352-53 week fiscal year ending on the Sunday closest to December 31. All references herein to the fiscal years ended January 2, 2011 and January 3, 2010 will be referred to as the fiscal years ended December 31, 2010 and 2009, respectively. Similarly, all references herein to the three and nine months ended October 2, 2011 and October 3, 2010 will be referred to as the three and nine months ended September 30, 2011 and September 30, 2010, respectively.1. The fiscal year ended December 31, 2010January 1, 2012 contained 52 weeks. The three and ninesix months ended September 30,July 1, 2012 and July 3, 2011 and 2010 each contained thirteen and thirty-ninetwenty-six weeks, respectively.ninesix months ended September 30,July 1, 2012 and July 3, 2011 and 2010 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 financial statements have been included. The results of operations for the three and ninesix months ended September 30,July 1, 2012 and July 3, 2011 and 2010 are not necessarily indicative of the results to be expected for the full year.December 31, 2010January 1, 2012 contained in the Company’s 20102011 Annual Report on Form 10-K.10-K, as amended. The December 31, 2010January 1, 2012 balance sheet data is derived from those audited financial statements.CARROLS RESTAURANT GROUP, INC.NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—Continued(in thousands of dollars except share and per share amounts)•Current Assets and Liabilities. The carrying value of cash and cash equivalents, trade and other receivables, accounts payable and accrued liabilities approximates fair value because of the short maturity of those instruments.•CarrolsSenior Subordinated Notes. The fair values of Carrols outstanding senior subordinated notes were based on quoted market prices. The fair value at December 31, 2010 was approximately $165.4 million.•Fiesta Restaurant Group Senior Secured Second Lien Notes due 2016. The fair value of outstanding senior secured second lien notes is based on recent trading values, and at September 30, 2011 was approximately $199.0 million.•Revolving and Term Loan Credit Facilities. Based upon the rates and other terms of the credit facilities entered into in the third quarter of 2011, the fair value of the outstanding borrowings under the Carrols LLC and Fiesta Restaurant Group credit facilities approximates market value at September 30, 2011.income taxes, evaluation for impairment of goodwill, long-lived assets and Burger King franchise rights and lease accounting matters. Actual results could differ from those estimates.evaluated forconducted an evaluation of subsequent events through the issuance date of the Company’s financial statements.2.On May 30, 2012, the Company completed the acquisition of 278 of Burger King Corporation ("BKC") company-owned Burger King® restaurants for a purchase price consisting of (i) a 28.9% equity ownership interest in the Company (subject to certain limitations), (ii) $3.8 million for cash on hand and inventory at the acquired restaurants and (iii) $9.4 million of franchise fees and $3.8 million for BKC’s assignment of its right of first refusal on franchisee restaurant transfers in 20 states ("ROFR") pursuant to an operating agreement with BKC entered into at closing. The ROFR is payable in quarterly payments over five years and the first quarterly payment of $0.2 million was made at closing. The Company also entered into new franchise agreements pursuant to the purchase and operating agreements and entered into leases with BKC for all of the acquired restaurants, including leases for 81 restaurants owned in fee by BKC and subleases for 197 restaurants under terms substantially the same as BKC’s underlying leases for those properties. Pursuant to the operating agreement, the Company also agreed to remodel 455 Burger King restaurants to BKC’s 20/20 restaurant image, including 57 restaurants in 2012, 154 restaurants in 2013, 154 restaurants in 2014 and 90 restaurants in 2015.Equity consideration - Issuance of 100 shares of Series A Convertible Preferred Stock $ 57,711 Cash purchase price: Cash 417 Inventory 3,336 Franchise fees 9,443 Right of first refusal 3,805 Total estimated consideration $ 74,712 Fair value of assets acquired, including cash acquired $ 74,712 Less: Cash acquired 417 Less: equity consideration - issuance of 100 shares of Series A Convertible Preferred Stock 57,711 Less: additional consideration accrued but not paid 4,449 Net cash paid for the acquisition $ 12,135 Cash $ 417 Inventory 3,336 Restaurant equipment 26,857 Restaurant equipment - subject to capital lease 10,870 Favorable/unfavorable leases 113 Capital lease obligation for equipment (10,870 ) Franchise fees 9,443 Franchise rights 34,546 Net assets acquired $ 74,712 Three Months Ended Six Months Ended July 1, 2012 July 3, 2011 July 1, 2012 July 3, 2011 Restaurant sales $ 174,090 $ 164,068 $ 332,978 $ 315,496 Net loss from continuing operations $ (2,664 ) $ (967 ) ` $ (8,937 ) $ (3,762 ) Net loss per share from continuing operations, basic and diluted $ (0.12 ) $ (0.04 ) $ (0.40 ) $ (0.17 ) Three Months Ended Six Months Ended July 1, 2012 July 3, 2011 July 1, 2012 July 3, 2011 Revenues $ 49,222 $ 121,249 $ 175,364 $ 236,865 Income (loss) from discontinued operations before income taxes 1,875 6,395 (744 ) 13,267 Provision for (benefit from) income taxes 1,207 1,187 (788 ) 4,981 Net income from discontinued operations $ 668 $ 5,208 $ 44 $ 8,286 On January 15, 2011,Company granted inSpin-off of Fiesta, on March 5, 2012 Carrols Restaurant Group converted all of its outstanding vested stock options to shares of the aggregate 360,200Company's common stock and all of its outstanding non-vested stock options to non-vested shares of itsthe Company's common stock to certain employees. In general, thesestock. The non-vested shares will generally vest 25% per year and will be expensed over their 4 year vesting period. Included inthe same period as the non-vested restricted share grant were 200,000 shares granted to our Chief Executive Officer, of which 100,000 shares will be expensed over a one year period ending January 15, 2012 and 100,000 shares will be expensed through December of 2013.ninesix months ended September 30, 2011July 1, 2012 was $0.7$0.2 million and $2.2$0.3 million, respectively. As of September 30, 2011,July 1, 2012, the total non-vested stock-based compensation expense relating to the options and non-vested shares was approximately $3.3$1.2 million and the. The Company expects to record an additional $0.7$0.6 million as compensation expense infor the fourth quarterremainder of 2011.2012. At September 30, 2011,July 1, 2012, the remaining weighted average vesting period for stock options and non-vested shares was 2.5 years and 3.0 years, respectively.2.0 years. 2006 Plan Options outstanding at January 1, 2012 2,438,327 $ 9.33 3.2 $ 8,275 Granted — — Exercised (69,824 ) 4.20 Cancelled (1) (2,348,950 ) 9.51 Forfeited (19,553 ) 6.58 Options outstanding at July 1, 2012 — $ — — $ — Vested or expected to vest at July 1, 2012 — $ — — $ — Options exercisable at July 1, 2012 — $ — — $ — ContinuedStock OptionsA summary of all option activity for the nine months ended September 30, 2011 was as follows: Number of
Options Weighted
Average
Exercise Price Average
Remaining
Contractual
Life Aggregate
Intrinsic
Value (1) 2,588,017 $ 9.17 4.2 $ 2,948 — (46,213 ) 5.86 (34,134 ) 9.27 2,507,670 $ 9.23 3.5 $ 4,734 2,490,776 $ 9.25 3.5 $ 4,680 1,724,062 $ 10.66 3.0 $ 2,246 Shares Nonvested at January 1, 2012 385,426 $ 7.54 Granted (1) 320,958 11.36 Vested (2) (255,860 ) 7.58 Forfeited (15,614 ) 9.33 Nonvested at July 1, 2012 434,910 $ 10.24 (1) The aggregate intrinsic value was calculated usingIncludes the difference between the market priceconversion of all of outstanding vested stock options to shares of the Company’sCompany's common stock at October 2, 2011and all of $8.90 and the grant price for only those awards that had a grant price that was less than the market priceits outstanding non-vested stock options to non-vested shares of the Company’sCompany's common stock at October 2, 2011.as discussed above.A summary of all non-vested shares activity for the nine months ended September 30, 2011 was as follows: Shares Weighted
Average
Grant Date
Price 45,701 $ 6.16 368,534 7.68 (16,439 ) 6.01 (3,950 ) 6.67 393,846 $ 7.59 3.(2) The Level 3 assets measured at fair value associated with impairment charges recorded during the nine months ended September 30, 2011 totaled $0.1 million.CARROLS RESTAURANT GROUP, INC.NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—Continued(in thousands of dollars except share and per share amounts)Impairment of long-lived assets and other lease charges (recoveries) for the Company’s segments were as follows: Three Months Ended
September 30, Nine Months Ended
September 30, 2011 2010 2011 2010 $ 57 $ 98 $ 1,028 $ 379 70 86 706 2,069 (138 ) 7 310 1,644 $ (11 ) $ 191 $ 2,044 $ 4,092 September 30,July 1, 2012 and July 3, 2011 the Company recorded other lease charges of $0.1 million associated with the closure of a Pollo Tropical restaurant in the third quarter and $0.1 million of income to reduce the Company’s future minimum lease payments and ancillary costs related to a non-operating Taco Cabana restaurant property. During the nine months ended September 30, 2011, the Company also recorded impairment and other lease charges of $1.0 million for underperforming Burger King restaurants, $0.6 million in other lease charges for two previously closed Pollo Tropical restaurants, $0.3 million of lease charges for a Taco Cabana restaurant that was closed in the second quarter of 2011, and $0.2 million in lease charges for two previously closed Taco Cabana restaurants.During the nine months ended September 30, 2010,, the Company recorded impairment and other lease charges of $4.1$$0.1 million which included $1.4, $0.1 million for an, $0.2 million and $1.0 million, respectively, related to certain underperforming Pollo Tropical restaurant and $0.3 million to reduce the fair market value of a previously impaired Pollo Tropical restaurant. In addition, the Company recorded charges of $1.1 million for an underperforming Taco Cabana restaurant, $0.3 million to reduce the fair market value of a previously impaired Taco Cabana restaurant and $0.4 million associated with three underperforming Burger King restaurants.4.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 December 31 and does not believe circumstances have changed since the last assessment date which would make it necessary to reassess their values. changes in goodwill or goodwill impairment losses during the ninesix months ended September 30, 2011July 1, 2012 or the year ended December 31, 2010. GoodwillJanuary 1, 2012. The change in goodwill balances areis summarized below: Pollo
Tropical Taco
Cabana Burger
King Total $ 56,307 $ 67,177 $ 1,450 $ 124,934 Balance, Discontinued Balance, January 1, 2012 operations July 1, 2012 Goodwill $ 124,934 (123,484 ) $ 1,450 Burger King Franchise Rights.Amounts allocated to franchise rights for each acquisition of Burger King acquisitionrestaurants are amortized using the straight-line method over the average remaining term of the acquired franchise agreements plus one twenty-yeartwenty-year renewal period. Burger King 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 Burger King 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 Burger King franchise rights for the three and ninesix months ended September 30,July 1, 2012 and July 3, 2011.2010.Burger King franchise rights was $799$875 and $799 for both the three months ended September 30,July 1, 2012 and July 3, 2011 and 2010,, respectively, and $2,398$1,673 and $1,598 for both the ninesix months ended September 30,July 1, 2012 and July 3, 2011 and 2010,, respectively. The Company estimates the amortization expense for the year ending December 31, 201130, 2012 to be $3,764 and for each of the five succeeding years to be $3,194.CARROLS RESTAURANT GROUP, INC.$4,181NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—Continued(. These estimates are based on a preliminary purchase price allocation of the acquisition discussed in thousands of dollars except share and per share amounts)5.Note 2.September 30, 2011July 1, 2012 and December 31, 2010January 1, 2012 consisted of the following: September 30,
2011 December 31,
2010 $ 65,000 $ — — 87,250 200,000 — — 165,000 1,157 1,202 266,157 253,452 (6,552 ) (15,538 ) $ 259,605 $ 237,914 On August 5, 2011 July 1,
2012 January 1,
2012Collateralized: Carrols Restaurant Group 11.25% Senior Secured Second Lien Notes $ 150,000 $ — Prior Carrols LLC Revolving Credit borrowings — 4,000 Prior Carrols LLC Credit Facility-Term loan borrowings — 63,375 Fiesta Restaurant Group 8.875% Senior Secured Second Lien Notes — 200,000 Capital leases 10,927 1,144 160,927 268,519 Less: current portion (1,028 ) (6,553 ) $ 159,899 $ 261,966 LLC and Fiesta Restaurant Group each entered into a new and independent senior secured credit facility. The newSenior Secured Second Lien Notes. On May 30, 2012, Carrols LLC senior secured credit facility provides for aggregate term loan borrowings of $65.0 million and a revolving credit facility that provides for aggregate borrowings of up to $20.0 million. The new Fiesta Restaurant Group senior secured credit facility consists of a revolving credit facility that provides for aggregate borrowings of up to $25.0 million. Also on August 5, 2011, Fiesta Restaurant Group issued $200.0$150.0 million of 8.875%11.25% Senior Secured Second Lien Notes due 20162018 (the “Fiesta Notes”). Carrols LLC used net proceeds from the term loan borrowings of $65.0 million under the Carrols LLC secured credit facility and Fiesta Restaurant Group used net proceeds from the sale of the Fiesta Notes to distribute funds to Carrols to enable Carrols to (i) repay all outstanding indebtedness under Carrols prior senior credit facility, (ii) repurchase its outstanding 9% Senior Subordinated Notes due 2013 (the “Carrols Notes”"Notes") pursuant to a cash tender offer and related consent solicitation and to pay the related tender premium and (iii) pay related fees and expenses. On October 2, 2011, there were no outstanding revolving credit borrowings under the new Carrols LLC senior secured credit facility or the new Fiesta Restaurant Group senior secured credit facility.In connection with these transactions, on July 22, 2011 Carrols commenced a tender offer and consent solicitation for allan indenture dated as of its outstanding Carrols Notes. On August 5, 2011, $118.4 million were accepted for payment and paid by Carrols. Carrols LLC distributed to Carrols net proceedsMay 30, 2012 governing such notes. Proceeds from the term loanissuance of the Notes were used to repay $ of $65.0 million under the Carrols LLC senior secured credit facility, to pay $12.0 million related to the acquisition of Burger King restaurants from BKC, to pay $4.5 million for fees and Fiesta Restaurant Group distributedexpenses related to Carrols netthe offering of the Notes paid at closing and to fund a $20.0 million cash collateral account required under the Company's new senior credit facility discussed below. The remainder of the proceeds fromof $48.7 million will be used together with anticipated operating cash flow and the sale of $200.0 million of Fiesta Notescash collateral account, as it becomes unrestricted, to enable Carrolsfund the restaurant remodeling obligations committed to redeemin connection with the balance of its outstanding Carrols Notes not tenderedacquisition, and to fund future payments to BKC for the ROFR acquired in the tender offer, which expiredacquisition.August 18, 2011. On August 22, 2011,May 15, 2018. Interest is payable semi-annually on May 15 and November 15, beginning November 15, 2012. The Notes are guaranteed by Carrols completed the cash tender offer and consent solicitation for all of its outstanding notes and called for the redemption of the $46.2 million of the Carrols Notes that were not tendered in the tender offer and irrevocably deposited with the trustee for the Carrols Notes an amount of funds sufficient to redeem the Carrols Notes. Consequently, on August 22, 2011, each of Carrols and the subsidiary guarantors terminated its obligations under the Carrols Notes and under the indenture governing the Carrols Notes.As a result of these refinancing transactions, Carrols recorded a loss on extinguishment of debt in the third quarter of 2011 of $2.4 million consisting of the write-off of previously deferred financing fees of $1.5 million, the tender premium paid for redemption of the Carrols Notes and other professional fees associated with the tender offer.New Senior Secured Credit Facilities.On August 5, 2011 Fiesta Restaurant Group entered into a first lien revolving credit facility providing for aggregate borrowings of up to $25.0 million (including $10.0 million available for letters of credit). The revolving credit facility also provides for incremental increases of up to $5.0 million, in the aggregate, to the revolving credit borrowings available under the facility, and matures on February 5, 2016. Borrowings under the revolving credit facility bear interest at a per annum rate, at Fiesta Restaurant Group’s option, of either (all terms as defined in the Fiesta Restaurant senior secured credit facility):1) the Alternate Base Rate plus the applicable margin of 2.0% to 2.75% based on Fiesta Restaurant Group’s Adjusted Leverage Ratio (with an initial applicable margin set at 2.5% until the delivery of financial statements for the fourth fiscal quarter of 2011 to the agentmaterial subsidiaries and lenders under the Fiesta Restaurant Group senior secured credit facility), orCARROLS RESTAURANT GROUP, INC.NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—Continued(in thousands of dollars except share and per share amounts)2) the LIBOR Rate plus the applicable margin of 3.0% to 3.75% based on Fiesta Restaurant Group’s Adjusted Leverage Ratio (with an initial applicable margin set at 3.5% until the delivery of financial statements for the fourth fiscal quarter of 2011 to the agent and lenders under the Fiesta Restaurant Group senior secured credit facility).Fiesta Restaurant Group’s obligations under the Fiesta Restaurant Group senior secured credit facility are secured by a first priority liensecond-priority liens on substantially all of the assets of FiestaCarrols Restaurant GroupGroup’s and its material subsidiaries, as guarantors,subsidiaries’ assets (including a pledge of all of the capital stock and equity interests of its material subsidiaries). Fiesta Restaurant Group senior secured senior credit facility contains customary default provisions, including without limitation, a cross default provision pursuant to which it is an event of default under this facility if there is a default under any indebtedness of Fiesta Restaurant Group having an outstanding principal amount of $2.5 million or more which results in the acceleration of such indebtedness prior to its stated maturity or is caused by a failure to pay principal when due. As of October 2, 2011, Fiesta Restaurant Group was in compliance with the covenants under its senior secured credit facility. After reserving $7.6 million for letters of credit guaranteed by the facility, $17.4 million was available for borrowing at October 2, 2011.On August 5, 2011 Carrols LLC entered into a new senior secured credit facility, which provides for $65.0 million aggregate term loan borrowings and a revolving credit facility which provides for aggregate borrowings of up to $20.0 million (including $10.0 million available for letters of credit) both maturing on August 5, 2016. The Carrols LLC senior secured credit facility also provides for incremental borrowing increases of up to $25 million, in the aggregate, to the revolving credit facility and term loan borrowings available under the facility. Borrowings under the term loan and revolving credit borrowings under the facility bear interest at a per annum rate, at Carrols LLC’s option, of either (all terms as defined in the Carrols LLC senior secured credit facility):1) the Alternate Base Rate plus the applicable margin of 2.25% to 4.0% based on Carrols LLC’s Adjusted Leverage Ratio (with an initial applicable margin set at 2.75% until the delivery of financial statements for the fourth fiscal quarter of 2011 to the agent and lenders under the Carrols LLC senior secured credit facility), or2) the LIBOR Rate plus the applicable margin of 3.25% to 4.0% based on Carrols LLC’s Adjusted Leverage Ratio (with an initial applicable margin set at 3.75% until the delivery of financial statements for the fourth fiscal quarter of 2011 to the agent and lenders under the Carrols LLC senior secured credit facility).Under the Carrols LLC senior secured credit facility, Carrols LLC will be required to make mandatory prepayments of principal on term loan borrowings (i) annually in an amount equal to 50% to 100% of Excess Cash Flow (as defined in the Carrols LLC senior secured credit facility) based on Carrols LLC’s Adjusted Leverage Ratio and (ii) in the event of dispositions of assets, debt issuances and insurance and condemnation proceeds (all subject to certain exceptions).The term loan borrowings under the Carrols LLC senior secured credit facility are payable in consecutive quarterly principal payments of $1.625 million beginning on the last day of the fourth quarter of 2011 through the first quarter of 2016 with the remaining outstanding principal amount of $30.75 million due on the maturity date of August 5, 2016.Carrols LLC’s obligations under the Carrols LLC senior secured credit facility are secured by a first priority lien on substantially all of the assets of Carrols LLC and by a pledge by Carrols of all of the outstanding equity interests of Carrols LLC.The Carrols LLC senior secured credit facility contains customary default provisions, including without limitation, a cross default provision pursuant to which it is an event of default under this facility if there is a default under any indebtedness of Carrols LLC having an outstanding principal amount of $2.5 million or more which results in the acceleration of such indebtedness prior to its stated maturity or is caused by a failure to pay principal when due. As of October 2, 2011, Carrols LLC was in compliance with the covenants under its senior secured credit facility. After reserving $5.9 million for letters of credit guaranteed by the facility, $19.1 million was available for borrowing at October 2, 2011.CARROLS RESTAURANT GROUP, INC.NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—Continued(in thousands of dollars except share and per share amounts)Fiesta Restaurant Group Senior Secured Second Lien Notes.On August 5, 2011, Fiesta Restaurant Group issued $200.0 million of 8.875% Senior Secured Second Lien Notes due 2016 pursuant to an indenture dated as of August 5, 2011 governing such notes. The Fiesta Notes mature and are payable on August 15, 2016. Interest is payable semi-annually on February 15 and August 15 with the first interest payment due on February 15, 2012. The Fiesta Notes are secured by second-priority liens on substantially all of Fiesta Restaurant Group’s and its material subsidiaries’ assets.The Fiesta Notes are redeemable at the option of FiestaCarrols Restaurant Group in whole or in part at any time after FebruaryMay 15, 20142015 at a price of 104.438%FebruaryMay 15, 2015, 102.219%2016, 102.813% of the principal amount plus accrued and unpaid interest, if any, if redeemed after FebruaryMay 15, 20152016 but before FebruaryMay 15, 20162017 and 100% of the principal amount plus accrued and unpaid interest, if any, if redeemed after FebruaryMay 15, 2016.2017. Prior to February 14, 2014, FiestaMay 15, 2015, Carrols Restaurant Group may redeem some or all of the Fiesta 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, at any time prior to February 15, 2014, Fiesta Restaurant Groupthe indenture governing the Notes also provides that the Company may redeem up to 35% of the Fiesta Notes withusing the net cash proceeds from specifiedof certain equity offerings atcompleted before May 15, 2015.redemption price equal to 108.875%holding company that has no independent assets or operations. There are no significant restrictions on the ability of the principal amountCompany or any of each notethe guarantor subsidiaries to be redeemed, plus accrued and unpaid interest, if any, toobtain funds from its respective subsidiaries. All consolidated amounts in the dateCompany's financial statements are representative of redemption. Fiesta Notes includes certain covenants, including limitations and restrictions on FiestaCarrols Restaurant Group and its material subsidiaries who are guarantors under such indenture to, among other things: incur additional debt,indebtedness or issue preferred stock,stock; incur liens; pay dividends or make distributions in respect of capital stock or make certain other restricted payments or investments, incur liens,investments; sell assets, enter into transactions with affiliates,assets; agree to payment restrictions affecting certain of its material subsidiaries andsubsidiaries; enter into mergers, consolidationstransaction with affiliates; or sales of allmerge, consolidate or sell substantially all of Fiesta Restaurant Group’sthe Company's assets.its material subsidiaries’ assets. These covenants are subject to certain exceptions and qualifications including, without limitation, permittingmarket value of such capital stock or equity interests exceeds 20% of the spin-off transaction discussed in Note 1. Fiesta Notes contains customary default provisions, including without limitation, a cross default provision pursuant to which it is an event of default under these notes and the indenture if there is a default under any indebtedness of FiestaCarrols Restaurant Group having an outstanding principal amount of $15.0$15.0 million or more which results in the acceleration of such indebtedness prior to its stated maturity or is caused by a failure to pay principal when due. FiestaCarrols Restaurant groupGroup was in compliance as of October 2, 2011July 1, 2012 with the restrictive covenants of the indenture governing the Fiesta Notes.PriorRestaurant Group Senior Credit Facility.Carrols’ priorOn May 30, 2012, Carrols Restaurant Group entered into a senior credit facility, totaled $185 million, originally consisting of $120 million principal amount of term loan A borrowings and a $65.0 millionwhich provides for aggregate revolving credit facility (including a sub limitborrowings of up to $25.0$20.0 million (including $15.0 million available for letters of credit) maturing on May 30, 2017. The senior credit facility also provides for incremental borrowing increases of up to $25.0 million, in the aggregate.$5.0$20.0 million (including $10.0 million available for swingline loans),letters of credit) both maturing on March 8,August 5, 2016.Carrols Prior Senior Subordinated Notes.Carrols’ prior senior subordinated notes consisted of issued $180 million of 9% Senior Subordinated Notes due 2013 that bore interest at a rate of 9% payable semi-annually on January 15 and July 15 and matured on January 15, 2013.6.ninesix months ended September 30, 2011July 1, 2012 and 2010July 3, 2011 was comprised of the following: Three Months Ended
September 30, Nine Months Ended
September 30, 2011 2010 2011 2010 $ 956 $ 2,620 $ 890 $ 5,207 458 166 3,464 248 $ 1,414 $ 2,786 $ 4,354 $ 5,455 Three Months Ended July 1, 2012 Six Months Ended July 1, 2012 2012 2011 2012 2011 Current $ 1,115 $ (1,506 ) $ (174 ) $ (4,223 ) Deferred (3,897 ) 2,182 (2,099 ) 2,182 $ (2,782 ) $ 676 $ (2,273 ) $ (2,041 ) provisionbenefit for income taxes for the three and ninesix months ended September 30, 2011July 1, 2012 was derived using an estimated effective annual income tax rate for 2011all of 30.1%2012 of 42.9%, which excludes any discrete tax adjustments. Discrete tax adjustments decreased the provisionbenefit for income taxes by $95 and $336$0.3 million in both the three and ninesix months ended September 30, 2011, respectively.CARROLS RESTAURANT GROUP, INC.July 1, 2012NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—Continued.(in thousands of dollars except share and per share amounts)ninesix months ended September 30, 2010July 3, 2011 was derived using an estimated effective annual income tax rate for 20102011 of 36.6%76.7%, which excludes any discrete tax adjustments. The 2011 effective tax rate is higher than 2012 due to a disproportional level of employment related tax credits in 2011. Discrete tax adjustments increaseddecreased the provision for income taxes by $108 and $38$0.1 million in both the three and ninesix months ended September 30, 2010, respectively.July 3, 2011.September 30, 2011July 1, 2012 and December 31, 2010,January 1, 2012, the Company had no unrecognized tax benefits and no accrued interest related to uncertain tax positions.2008-20102008-2011 remain open to examination by the major taxing jurisdictions to which the Company is subject. Although it is not reasonably possible to estimate the amount by which unrecognized tax benefits may increase within the next twelve months due to the uncertainties regarding the timing of any examinations, the Company does not expect unrecognized tax benefits to significantly change in the next twelve months.7.September 30, 2011July 1, 2012 and December 31, 2010January 1, 2012 consisted of the following: September 30,
2011 December 31,
2010 $ 13,861 $ 13,250 3,583 3,423 901 2,937 3,164 3,442 $ 21,509 $ 23,052 July 1,
2012 January 1,
2012Accrued occupancy costs $ 4,829 $ 14,296 Accrued workers’ compensation and general liability claims 1,411 3,208 Deferred compensation 258 965 Obligation to BKC for right of first refusal 2,853 — Other 2,409 3,198 $ 11,760 $ 21,667 following table presentsCompany is fully liable for all obligations under the activityterms of the leases in the closed-store reserve included in accrued occupancy costs at September 30, 2011event that Fiesta fails to pay any sums due under the lease, subject to indemnification provisions of the Separation and December 31, 2010: Nine months ended
September 30, 2011 Year ended
December 31, 2010 $ 1,665 $ 862 987 1,279 (753 ) (632 ) 117 156 $ 2,016 $ 1,665 8. Postretirement BenefitsThe Company provides postretirement medical benefits covering substantially all Burger King administrative and restaurant management salaried employees who retire or terminate after qualifying for such benefits. A December 31 measurement date is used for postretirement benefits.Continuedfollowing summarizes the components of net periodic postretirement benefit income: Three Months Ended
September 30, Nine Months Ended
September 30, 2011 2010 2011 2010 $ 7 $ 8 $ 21 $ 23 24 27 73 81 25 24 74 73 (90 ) (90 ) (269 ) (270 ) $ (34 ) $ (31 ) $ (101 ) $ (93 ) During the nine months ended September 30, 2011,maximum potential liability for future rental payments the Company made contributions of $130 to its postretirement plan and expectscould be required to make additional contributions during 2011. Contributionsunder these leases at byto date and none are expected to be required to be made in the Company to its postretirement plan for the year ended December 31, 2010 were $156.9. Lease Financing Obligationspreviously entered into sale-leaseback transactions involving certain restaurant properties thatnot recorded a liability for those guarantees in accordance with ASC 460 - Guarantees as Fiesta has indemnified the Company for all such obligations and the Company did not qualify for sale-leaseback accounting and as a result were classified as financing transactions. Under the financing method, the assets remain on the consolidated balance sheet and proceeds received by the Company from these transactions are recorded as a financing liability. Payments under these leases are applied as payments of imputed interest and deemed principal on the underlying financing obligations.During the second quarter of 2011, the Company entered into a sale-leaseback transaction for a restaurant property that did not qualify for sale-leaseback accounting and the net proceeds of $1.7 million were recorded as a lease financing obligation. In the third quarter of 2011, the condition that precluded sale-leaseback accounting was cured. As a result, the Company reduced its lease financing obligations by $1.7 million and recorded a loss of $0.1 million which is included in other income (expense) on the consolidated statement of operations.Interest expense associated with lease financing obligations for the three months ended September 30, 2011 and 2010 was $0.3 million and $0.2 million, respectively, and was $0.8 million and $0.7 million for the nine months ended September 30, 2011 and 2010, respectively.10. Business Segment InformationThe Company is engaged in the quick-service and quick-casual restaurant industry, with three restaurant concepts: Burger King, operating as a franchisee, and Pollo Tropical and Taco Cabana, both Company-owned concepts. Pollo Tropical is a quick-casual restaurant brand offering a wide selection of tropical and Caribbean-inspired food, featuring grilled chicken marinated in a proprietary blend of tropical fruit juices and spices. Taco Cabana is a quick-casual restaurant brand offering a wide selection of fresh Tex-Mex and traditional Mexican style food, including sizzling fajitas, quesadillas, enchiladas, burritos and other Tex-Mex dishes.The accounting policies of each segment are the same as those described in the summary of significant accounting policies included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010. The following table includes Adjusted Segment EBITDA, which is the measure of segment profit or loss reported to the chief operating decision maker for purposes of allocating resources to the segments and assessing their performance. Adjusted Segment EBITDA is defined as earnings attributable to the applicable segment before interest, income taxes, depreciation and amortization, impairment losses and other lease charges, stock-based compensation expense, other income and expense and gains and losses on extinguishment of debt.The “Other” column includes corporate related items not allocated to reportable segments and consists primarily of cash, certain other assets, corporate property and equipment, goodwill and deferred income taxes.CARROLS RESTAURANT GROUP, INC.NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—Continued(in thousands of dollars except share and per share amounts) Pollo
Tropical Taco
Cabana Burger
King Other Consolidated $ 52,675 $ 68,482 $ 90,599 $ — $ 211,756 17,499 21,334 26,868 — 65,701 12,114 20,430 27,619 — 60,163 2,505 4,011 5,749 — 12,265 3,271 3,429 7,002 — 13,702 2,034 2,288 3,506 418 8,246 8,582 7,353 6,150 3,187 2,508 6,120 381 12,196 $ 47,567 $ 63,702 $ 90,356 $ — $ 201,625 15,020 18,939 26,134 — 60,093 11,419 19,394 28,214 — 59,027 2,428 3,908 5,699 — 12,035 3,306 2,424 6,292 — 12,022 2,004 2,226 3,394 456 8,080 7,489 6,483 6,394 3,842 3,395 2,658 252 10,147 $ 157,553 $ 200,469 $ 260,816 $ — $ 618,838 52,062 62,790 77,336 — 192,188 36,721 60,228 82,014 — 178,963 7,255 12,121 17,151 — 36,527 9,735 9,885 21,687 — 41,307 6,117 6,912 10,503 1,211 24,743 28,222 20,849 12,402 7,344 10,353 13,942 1,228 32,867 $ 139,873 $ 189,941 $ 271,431 $ — $ 601,245 44,880 56,644 80,736 — 182,260 34,249 58,055 85,468 — 177,772 7,314 11,743 17,566 — 36,623 9,184 8,277 19,735 — 37,196 5,876 6,744 10,344 1,351 24,315 22,361 20,117 15,702 7,719 8,314 9,422 857 26,312 $ 50,173 $ 59,893 $ 146,779 $ 195,211 $ 452,056 51,125 63,061 142,922 169,194 426,302 (1)For the Pollo Tropical and Taco Cabana segments, such amounts include general and administrative expense related directly to each segment. For the Burger King segment, such amounts include general and administrative expenses related directly to the Burger King segment as well as expenses associated with administrative support to the Company’s Pollo Tropical and Taco Cabana segments for executive management, information systems and certain accounting, legal and other administrative functions. For the three andCARROLS RESTAURANT GROUP, INC.NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—Continued(in thousands of dollars except share and per share amounts)nine months ended September 30, 2011, the administrative support expenses included in the Burger King segment provided to Pollo Tropical were $1.1 million and $3.3 million, respectively, and the administrative support expenses provided to Taco Cabana were $1.4 and $4.2 million, respectively. For the three and nine months ended September 30, 2010, these administrative support expenses were $0.8 million and $2.8 million, respectively, for Pollo Tropical and $1.1 million and $3.6 million, respectively, for Taco Cabana.A reconciliation of Adjusted Segment EBITDA to consolidated net income is as follows: Three Months Ended
September 30, Nine Months Ended
September 30, 2011 2010 2011 2010 $ 8,582 $ 7,489 $ 28,222 $ 22,361 7,353 6,483 20,849 20,117 6,150 6,394 12,402 15,702 8,246 8,080 24,743 24,315 (11 ) 191 2,044 4,092 5,757 4,693 14,949 14,144 1,414 2,786 4,354 5,455 720 423 2,118 1,232 2,449 — 2,449 — 105 (400 ) (343 ) (400 ) $ 3,405 $ 4,593 $ 11,159 $ 9,342 11. Commitments and ContingenciesOn November 16, 1998, the Equal Employment Opportunity Commission (“EEOC”) filed suit in the United States District Court for the Northern District of New York (the “Court”), under Title VII of the Civil Rights Act of 1964, as amended, against Carrols. The complaint alleged that Carrols engaged in a pattern or practice of unlawful discrimination, harassment and retaliation against former and current female employees. The EEOC ultimately attempted to present evidence of 511 individuals that it believed constituted the “class” of claimants for whichbelieve it was seeking monetary and injunctive relief from Carrols. On April 20, 2005, the Court issued a decision and order granting Carrols’ Motion for Summary Judgment that Carrols filed in January 2004, dismissing the EEOC’s pattern or practice claim. Carrols then moved for summary judgment against the claims of the 511 individual claimants. On March 2, 2011, the Court issued a decision and order granting summary judgment against the claims of all but 131 of the 511 individual claimants and dismissed 380 of the individual claimants from the case. Both the EEOC and Carrols have since filed motions for reconsideration in part of the Court’s March 2, 2011 decision and order, as a result of which the number of surviving claimants may increaseprobable it would be required to as many as 184 or decrease to as few as four. It is not possible to predict the outcome of these motions at this time.Subject to possible appeal by the EEOC, the EEOC’s pattern or practice claim is dismissed; however, the Court has yet to determine how the claims of the individual claimants ultimately determined to survive will proceed. Although the Company believes that the EEOC’s continued class litigation argument is without merit, it is not possible to predict the outcome of that matter on an appeal, if one is taken. The Company does not believe thatperform under any of the remaining individual claims would have a material impact on its consolidated financial statements. other litigation matters incidental to the conduct of the Company’s business. The Company does not believe that the outcome of any of these other matters will have a material adverse effect on its consolidated financial statements.12. Net Income per ShareAs part of the acquisition, the Company issued to BKC Basic net income per share100 shares of Series A Convertible Preferred Stock which is computedconvertible into 28.9% of the outstanding shares of common stock calculated on the date of the closing of the acquisition on a fully diluted basis, subject to issuance limitations. See Note 12—Preferred Stock for further information. BKC also, as a result of the acquisition, has two representatives on the Company's board of directors.dividing net incomeBKC for its advertising, promotional programs and public relations activities. Advertising expense was $4.6 million and $3.5 million in the three months ended July 1, 2012 and July 3, 2011 and $7.3 million and $6.8 million in the six months ended July 1, 2012 and July 3, 2011, respectively.periodthree months ended July 1, 2012 and July 3, 2011 was $2.6 million and $0.4 million, respectively, and for the six months ended July 1, 2012 and July 3, 2011 was $3.1 million and $0.9 million, respectively. The Company believes the related party lease terms have not been significantly affected by the weighted average numberfact that the Company and BKC are deemed to be related parties.commonJuly 1, 2012, the Company owed BKC $3.6 million associated with its purchase of the right of first refusal related to the acquisition of BKC restaurants and $4.9 million related to the payment of advertising and royalties, which is remitted on a monthly basis.duringshares of Carrols Restaurant Group Common Stock ("Carrols Common Stock") calculated on the period. Diluted net income per sharedate of the closing of the acquisition on a fully diluted basis after giving effect to its issuance, or an aggregate of 9,414,580 shares of Carrols' Common Stock. The Preferred Stock is computedsubject to certain restrictions limiting its conversion and limiting the issuance of the shares of Carrols Common Stock upon the conversion to not exceed 19.9% of the outstanding shares of Carrols Common Stock as of the date of issuance (the "issuance limitation"). Pursuant to the purchase agreement, the removal of the issuance limitation will be subject to obtaining the approval of Carrols Restaurant Group stockholders.dividing net income for the period by the weighted average number of common shares outstanding plus the dilutive effect of outstanding stock options using the treasury stock method. To the extent such outstanding stock options are antidilutive they are excludedBKC from the calculationdate of diluted net income per share.ContinuedThe following table is a reconciliationamounts used inawards (also referred to as restricted stock awards) and the calculation ofPreferred Stock issued by the Company are participating securities because they have non-forfeitable rights to dividends. Accordingly, basic net income per share is calculated under the two-class method calculation. In determining the number of diluted shares outstanding, the Company is required to disclose the more dilutive earnings per share result between the treasury stock method calculation and the two-class method calculation.share: Three months ended September 30, Nine months ended September 30, 2011 2010 2011 2010 $ 3,405 $ 4,593 $ 11,159 $ 9,342 21,690,753 21,623,221 21,665,551 21,618,624 $ 0.16 $ 0.21 $ 0.52 $ 0.43 $ 3,405 $ 4,593 $ 11,159 $ 9,342 21,690,753 21,623,221 21,665,551 21,618,624 541,786 154,104 488,052 201,072 22,232,539 21,777,325 22,153,603 21,819,696 $ 0.15 $ 0.21 $ 0.50 $ 0.43 1,027,616 2,137,039 1,328,002 2,109,818 Three Months Ended Six Months Ended July 1, 2012 July 3, 2011 July 1, 2012 July 3, 2011 Basic net income (loss) per share: Net income (loss) from continuing operations $ (918 ) $ 300 $ (3,821 ) $ (532 ) Net income from discontinued operations $ 668 $ 5,208 $ 44 $ 8,286 Weighted average common shares outstanding 22,742,257 21,663,181 22,413,285 21,652,950 Basic net income (loss) per share from continuing operations $ (0.04 ) $ 0.01 $ (0.17 ) $ (0.02 ) Basic net income per share from discontinued operations $ 0.03 $ 0.24 $ 0.00 $ 0.38 Diluted net income (loss) per share: Net income (loss) from continuing operations $ (918 ) $ 300 $ (3,821 ) $ (532 ) Net income from discontinued operations $ 668 $ 5,208 $ 44 $ 8,286 Shares used in computing basic net income (loss) per share 22,742,257 21,663,181 22,413,285 21,652,950 Dilutive effect of preferred stock, non-vested shares and stock options — 497,333 — — Shares used in computing diluted net income (loss) per share 22,742,257 22,160,514 22,413,285 21,652,950 Diluted net income (loss) per share from continuing operations $ (0.04 ) $ 0.01 $ (0.17 ) $ (0.02 ) Diluted net income per share from discontinued operations $ 0.03 $ 0.24 $ 0.00 $ 0.38 Shares excluded from diluted net income (loss) per share computation (1) 9,849,490 1,031,344 9,849,490 1,478,196 (1) These shares subject to preferred stock, stock options and non-vested shares were not included in the computation of diluted net income (loss) per share because they would have been antidilutive for the periods presented. 13. Other Comprehensive IncomeThe items that currently impact the Company’s other comprehensive income are changes in postretirement benefit obligations, net of tax. Three months
ended September 30, Nine months
ended September 30, 2011 2010 2011 2010 $ 3,405 $ 4,593 $ 11,159 $ 9,342 — — — 10 $ 3,405 $ 4,593 $ 11,159 $ 9,352 Other Expense(Income)In the nine months ended September 30, 2011, the Company recorded a gain of $0.3 million related to the sale of a non-operating Burger King property and a gain of $0.1 million related to a property insurance recovery from a fire at a Burger King restaurant and a loss of $0.1 million from the sale of a Taco Cabana property in a sale-leaseback transaction. During the three months ended September 30, 2010, the Company recorded a gain of $0.4 million related to a property insurance recovery from a fire at a Burger King restaurant.15. Recent Accounting Developmentsimpairment.In September 2011, the FASB issued guidance on the presentationimpairment at All references herein to the fiscal years ended January 2, 2011 and January 3, 2010 will be referred to as the fiscal years ended December 31, 2010 and 2009, respectively. Similarly, all references herein to the three and nine months ended October 2, 2011 and October 3, 2010 will be referred to as the three and nine months ended September 30, 2011 and 2010, respectively. The fiscal years ended December 31, 2010January 1, 2012 and 2009January 2, 2011 each contained 52 weeks and 53 weeks, respectively, and the three and ninesix months ended September 30,July 1, 2012 and July 3, 2011 and 2010 each contained thirteen and thirty ninetwenty-six weeks, respectively.IntroductionDecember 31, 2010.January 1, 2012, as amended. The overview provides our perspective on the individual sections of MD&A, which include the following:Executive Summary—an executive review of our performance for the three months ended September 30, 2011.offrom Continuing Operations—an analysis of our results of continuing operations for the three and ninesix months ended September 30, 2011July 1, 2012 compared to the three and ninesix months ended September 30, 2010,July 3, 2011, respectively, including a review of material items and known trends and uncertainties.operating three restaurant brands in the quick-casual and quick-service restaurant segments with 551 restaurants located in 17 states as of October 2, 2011. We have been operating restaurants for more than 50 years. Through our indirect wholly-owned subsidiary, Fiesta Restaurant Group, Inc., we own and operate two restaurant brands, Pollo Tropical and Taco Cabana, which we acquired in 1998 and 2000, respectively (collectively “Fiesta Restaurant Group”). We are also the largest Burger King franchisee based onin the number of restaurants,world and have operated Burger King restaurants since 1976. As of October 2, 2011, our company-owned restaurants included 91 Pollo Tropical restaurants and 158 Taco Cabana restaurants, andJuly 1, 2012, we operated 302574 Burger King restaurants under franchise agreements.Wein 13 states. On May 30, 2012, we acquired 278 of Burger King Corporation, which we refer to as "BKC", company-owned Burger King® restaurants which we refer to as the "acquired restaurants". Our restaurants operated prior to the acquisition are franchisingreferred to as our Pollo Tropical restaurants primarily internationally and,"legacy restaurants". Our former indirect wholly-owned subsidiary, Fiesta Restaurant Group, Inc., which we refer to as of October 2, 2011,"Fiesta”, was spun off by us to our stockholders on May 7, 2012, which we had 30 franchised restaurants locatedrefer to as the "spin-off". The discussion in Puerto Rico, Ecuador, Honduras, the Bahamas, Trinidad, Venezuela andour MD & A is focused on college campuses in Florida. We also have agreements for the future development of franchised Pollo Tropical restaurants in Panama, Tobago, Aruba, Curacao, Bonaire and Costa Rica. Although we are not actively franchising our Taco Cabana restaurants, we had five Taco Cabana franchised restaurants at October 2, 2011 located in the United States.•Restaurant sales consist of food and beverage sales, net of discounts, at our company-owned and operated restaurants. Restaurant sales are influenced by menu price increases, new restaurant openings, closures of restaurants and changes in comparable restaurant sales. Restaurants are included in comparable restaurant sales after they have been open for 12 months for our Burger King restaurants and 18 months for our Pollo Tropical and Taco Cabana restaurants. For comparative purposes, the calculation of the changes in comparable restaurant sales is based on a 52-week year.•Cost of sales consists of food, paper and beverage costs including packaging costs, less purchase discounts. Cost of sales is generally influenced by changes in commodity costs, the sales mix of items sold and the effectiveness of our restaurant-level controls to manage food and paper costs. Key commodities for our Pollo Tropical and Taco Cabana restaurants, including chicken and beef, are generally purchased under contracts for future periods up to one year.•Restaurant wages and related expenses include all restaurant management and hourly productive labor costs, employer payroll taxes, restaurant-level bonuses and related benefits. Payroll and related taxes and benefits are subject to inflation, including minimum wage increases and increased costs for health insurance, workers’ compensation insurance and state unemployment insurance.•Restaurant rent expense includes base rent and contingent rent on our leases characterized as operating leases, reduced by the amortization of gains on sale-leaseback transactions.•Other restaurant operating expensesinclude all other restaurant-level operating costs, the major components of which are royalty expenses for our Burger King restaurants, utilities, repairs and maintenance, real estate taxes and credit card fees.•Advertising expense includes all promotional expenses including television, radio, billboards and other media for our Pollo Tropical and Taco Cabana restaurants and advertising payments based on a percentage of sales as required under our franchise agreements for our Burger King restaurants.•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 all of our restaurants, (2) legal, auditing and other professional fees and (3) stock-based compensation expense.•Adjusted Segment EBITDA, which is the measure of segment profit or loss used by our chief operating decision maker for purposes of allocating resources to our segments and assessing their performance, is defined as earnings attributable to the applicable segment before interest, income taxes, depreciation and amortization, impairment and other lease charges, stock-based compensation expense, other income and expense and gains and losses on the extinguishment of debt. Adjusted Segment EBITDA may not be necessarily comparable to other similarly titled captions of other companies due to differences in methods of calculation.•Depreciation and amortization expense primarily includes the depreciation of fixed assets, including equipment, owned buildings and leasehold improvements utilized in our restaurants, depreciation of assets under lease financing obligations and the amortization of Burger King franchise rights and franchise fees.•Interest expense consists primarily of borrowings under our bank credit facilities, interest expense associated with Carrols’ 9% Senior Subordinated Notes due 2013 (the “Carrols Notes”)which were repurchased in a tender offer or redeemed in the third quarter of 2011, the amortization of deferred financing costs, imputed interest expense on leases entered into in connection with sale-leaseback transactions which are accounted for as lease financing obligations and any gains and losses from the settlement of lease financing obligations. Subsequent to August 5, 2011, interest expense also includes interest associated with the issuance of $200 million of Fiesta Restaurant Group 8.875% Senior Secured Second Lien Notes due 2016.February 24, 2011 we announcedApril 16, 2012, our intention to split our business into two separate, publicly-traded companies throughboard of directors approved the tax-free spin-off of Fiesta, Restaurant Group, Inc. to our stockholders. Ifwhich through its subsidiaries, owns and operates the Pollo Tropical and Taco Cabana restaurant brands. In connection with the spin-off, is consummated,on April 24, 2012, we and Carrols entered into several agreements that govern our post spin-off relationship with Fiesta, including a Separation and Distribution Agreement, Tax Matters Agreement, Employee Matters Agreement and Transition Services Agreement. Amounts earned by us under the Transition Services Agreement were $1.0 million in the second quarter of 2012 and are expected to be approximately $4.4 million for all of 2012.Restaurant Group will be distributedunder the Securities Exchange Act of 1934, as amended, was declared effective by the SEC on April 25, 2012.our stockholders.Carrols Restaurant Group’s stockholders whereby each stockholder of Carrols Restaurant Group’s common stock of record on April 26, 2012 received one share of Fiesta common stock for every one share of Carrols Restaurant Group would continue to operate our Pollo Tropical and Taco Cabana businesses and we would continue to own and operate our franchised Burger King restaurants through our subsidiaries Carrols and Carrols LLC.We are implementing detailed plans for the proposed spin-off, including the separation plan, transaction structure and timing, composition of senior management and the boards of directors, capital structure and other matters. The spin-off will be subject to approval by our Board of Directors, customary regulatory and other approvals and the receipt of a favorable IRS tax ruling, among other things.We believe that the proposed spin-off will enable each company to better focus on its respective opportunities as well as to pursue its own distinct operating plan and growth strategy including acquisition opportunities in the Burger King system. We expect to complete the spin-off in the first quarter of 2012; however there can be no assurance that we will complete the spin-off by then or at all.Refinancing of Outstanding IndebtednessOn August 5, 2011, we completed a refinancing of our existing indebtedness. Carrols LLC and Fiesta Restaurant Group each entered into new and independent financing arrangements. The proceeds from these financings were used to repay all indebtedness outstanding under Carrols senior credit facility and the Carrols Notes, as well as to pay all related fees and expenses. Excess cash from the financings was approximately $9.5 million and is available to us for general corporate purposes.Fiesta Restaurant Group sold $200 million of 8.875% Senior Secured Second Lien Notes due 2016 (the “Fiesta Notes”)and entered into a $25 million senior secured revolving credit facility which was undrawn at closing. Carrols LLC entered into an $85 million senior secured credit facility including term loan borrowings of $65 million and an undrawn $20 million revolving credit facility. Proceeds from these borrowings were used to repay approximately $80.2 million outstanding under Carrols’ senior credit facility, to repurchase or redeem $165.0 million of the Carrols Notes, to pay accrued interest and related fees and expenses. Total interest expense is anticipated to increase approximately $2.0 million to $2.5 million in the second half of 2011 as a result of these transactions.Future Restaurant ClosuresWe evaluate the performance of our Burger King restaurants on an ongoing basis including an assessment of the current and future operating results of the restaurant, and in relation to Burger King franchise agreement renewals, the cost of required capital improvements. We may elect to close restaurants based on such evaluation. In 2010, we closed seven Burger King restaurants, not including restaurants relocated within the same market area. In the first nine months of 2011 we have closed four Burger King restaurants, not including one restaurant relocated within the same market area. We currently anticipate that we will close one or two additional Burger King restaurants in 2011, excluding any relocations.We also closed two underperforming Taco Cabana restaurants and two underperforming Pollo Tropical restaurants in 2010 and two underperforming Pollo Tropical restaurants and one underperforming Taco Cabana restaurant in the first nine months of 2011. We currently do not anticipate closing any additional Pollo Tropical or Taco Cabana restaurants in 2011.We do not believe that the future impact on our consolidated results of operations from such restaurant closures will be material, although there can be no assurance in this regard. Our determination of whether to close restaurants in the future is subject to further evaluation and may change.Executive Summary—Operating Performance for the Three Months Ended September 30, 2011Total revenues for the third quarter of 2011 increased 5.0% to $211.8 million from $201.6 million in the third quarter of 2010. Revenues from Fiesta Restaurant Group increased 8.9% in the third quarter of 2011 to $121.2 million and revenues from our Burger King restaurants increased 0.3% to $90.6 million from $90.4 million in the third quarter of 2010. Comparable restaurant sales in the third quarter of 2011 increased 7.9% at our Pollo Tropical restaurants, increased 5.3% at our Taco Cabana restaurants andincreased 1.6% at our Burger King restaurants. The comparable restaurant sales increase at our Pollo Tropical restaurants was primarily a result of higher customer traffic while the comparable sales increases at our Taco Cabana and Burger King restaurants was due primarily to an increase in average check.Restaurant operating margins in the third quarter of 2011 were negatively impacted by higher food costs at each of our three restaurant brands as cost of sales, as a percentage of total restaurant sales, increased to 31.1% from 29.9%. These increases were partially offset by favorable sales mix changes at our Burger King restaurants, and, to a lesser extent, at Pollo Tropical as well as menu price increases taken in the last twelve months. As a percentage of total restaurant sales, restaurant wages and related expenses decreased to 28.5% in the third quarter of 2011 from 29.3% in the third quarter of 2010 due to the effect of higher sales volumes at our Pollo Tropical and Taco Cabana restaurants on fixed labor costs and productive labor efficiencies at our Burger King restaurants. Advertising expense, as a percentage of total restaurant sales, decreased to 3.9% in the third quarter of 2011 from 4.4% in the third quarter of 2010 as a result of lower advertising spending for our Taco Cabana restaurants due to timing. Operating results were favorably impacted by lower utility costs which, as a percentage of total restaurant sales, decreased to 3.7% in the third quarter of 2011 from 3.9% in the third quarter of 2010.General and administrative expenses increased to $13.7 million in the third quarter of 2011 from $12.0 million in the third quarter of 2010 due to higher administrative bonus accruals of $1.1 million and higher stock-based compensation expense of $0.3 million. General and administrative expenses in the third quarter of 2011 also included $0.2 million of costs incurred in connection with the planned spin-off of Fiesta Restaurant Group.Total interest expense increased $1.1 million to $5.8 million in the third quarter of 2011 due to our refinancing activities in the third quarter, which increased our effective interest rates due to both the change in the composition of our total indebtedness and an increase in our LIBOR based borrowing margins in our new credit facilities.Our effective income tax rate in the third quarter of 2011, including discrete tax items which reduced income tax expense $0.1 million, decreased to 29.3% compared to 37.8% in the third quarter of 2010 due primarily to higher employment related tax credits.above,spin-off, Fiesta is now an independent company whose common stock is traded onnetoperating results as income decreased to $3.4 million in the third quarter of 2011or loss from $4.6 million in the third quarter of 2010.offrom Continuing OperationsSeptember 30, 2011July 1, 2012 Compared to Three Months Ended September 30, 2010September 30,July 1, 2012 and July 3, 2011 and 2010,, selected operating results from continuing operations as a percentage of consolidated restaurant sales: 2011 2010 24.8 % 23.5 % 32.3 % 31.6 % 42.9 % 44.9 % 100.0 % 100.0 % 31.1 % 29.9 % 28.5 % 29.3 % 5.8 % 6.0 % 14.3 % 14.7 % 3.9 % 4.4 % 6.5 % 6.0 % 2012 2011 Costs and expenses (all restaurants): Cost of sales 31.8 % 29.9 % Restaurant wages and related expenses 30.7 % 31.0 % Restaurant rent expense 6.5 % 6.4 % Other restaurant operating expenses 14.9 % 15.0 % Advertising expense 3.8 % 4.2 % General and administrative 6.6 % 5.5 % 2012 2011 Costs and expenses (legacy restaurants): Cost of sales 31.1 % 29.9 % Restaurant wages and related expenses 30.2 % 31.0 % Restaurant rent expense 6.1 % 6.4 % Other restaurant operating expenses 14.5 % 15.0 % Advertising expense 3.7 % 4.2 % 2012 Costs and expenses (acquired restaurants): Cost of sales 34.4 % Restaurant wages and related expenses 32.4 % Restaurant rent expense 8.0 % Other restaurant operating expenses 16.5 % Advertising expense 3.9 % thirdsecond quarter of 20102011 through the end of the thirdsecond quarter of 2011,2012, we have opened four new Pollo Tropicalone restaurant and closed nine restaurants. On May 30, 2012 we acquired 278 restaurants five new Taco Cabana restaurants and two new Burger King restaurants. One of the new Burger King restaurants was relocated within its market area. During the same period we closed eight Burger King restaurants, excluding relocations, three Pollo Tropical restaurants and two Taco Cabana restaurants.thirdsecond quarter of 20112012 increased 5.0%37.8%, to $211.4$122.1 million from $201.3$88.6 million in the third quarter of 2010. Total restaurant sales for Fiesta Restaurant Group increased 8.9% to $120.8 million in the third quarter of 2011 compared to $110.9 million in the third quarter of 2010.Pollo Tropical restaurant sales in the third quarter of 2011 increased 10.8% to $52.4 million due primarily to an increase in comparable restaurant sales of 7.9% resulting from a 5.8% increase in customer traffic and a 2.1% increase in average check, compared to the third quarter of 2010. In addition, four restaurants opened since the beginning of the third quarter of 2010 contributed $1.9 million in additional sales in the third quarter. The effect of menu price increases taken in the last twelve months was approximately 2.0% due to price increases taken primarily in the second quarter of 2011. There were no menu price increases at our Pollo Tropical restaurants in 2010.Taco Cabana restaurantRestaurant sales in the thirdsecond quarter of 20112012 for the acquired restaurants were $27.5 million. Comparable restaurant sales for our legacy restaurants increased 7.5% to $68.4 million due primarily to8.8% resulting from an increase in comparable restaurant salescustomer traffic of 5.3% in the third quarter of 2011 resulting from4.9% and a 6.4%3.9% increase in average check, which resulted from menu prices increases and a shift in sales mix partially offset by a 1.1% decrease in customer traffic. Theand the effect of menu price increases takenof 2.3% compared to the prior year. This was partially offset by the closure of nine restaurants since the beginning of the second quarter of 2011.last twelve months was approximately 3.7%, including price increases takensecond quarter of 2012 from 29.9% in the second quarter of 2011 due primarily to partiallyhigher commodity prices (1.3%), including higher beef and pork prices (0.8%), and higher promotional sales discounts (0.5%) offset recent increases in commodity costs. In addition, five restaurants opened since the beginning of the third quarter of 2010 contributed $1.9 million in additional sales in the third quarter.Burger King restaurant sales in the third quarter increased 0.3% to $90.6 million due topart by a 1.6% increase in comparable restaurant sales resulting from an increase in average check of 7.8% from a shift infavorable sales mix and the effect of menu price increases taken in the last twelve months of 4.8%approximately 2.3%. This waslower customer traffichigher credit card fees (0.2%).5.8%2012 from 4.2% in the second quarter of 2011 due primarily to advertising credits received from BKC that were associated with 2012 menu enhancement initiatives. These advertising credits total $5,400 annually per restaurant for 2012 through 2015. In 2012, $2,700 per restaurant was received in the first quarter with $900 per quarter to be received in each of the remaining quarters. For 2013 through 2015 these credits will be received ratably over each year.closure,second half of 2011.relocations,lease financing obligations, increased to 8.2% in the second quarter of eight Burger King2012 due to the issuance of the Notes. 2012 2011 Costs and expenses: Cost of sales 31.3 % 29.6 % Restaurant wages and related expenses 31.5 % 32.0 % Restaurant rent expense 6.6 % 6.7 % Other restaurant operating expenses 15.4 % 15.6 % Advertising expense 3.5 % 4.2 % General and administrative 6.9 % 5.9 % thirdsecond quarter of 2010.Pollo Tropical Restaurant Sales. Restaurant sales in the first six months of 2012 increased 21.9% to $207.6 million from $170.2 million in the first six months of 2011 due to the addition of the acquired restaurants and an increase in comparable restaurant sales for our legacy restaurants of 7.4%, from both increases in customer traffic and average check in each quarter, partially offset by net closures of nine restaurants since the beginning of 2011. In the first six months of 2012 the effect of menu price increases compared to the prior year was 2.7%.Pollo Tropicaltotal restaurant sales).Pollo Tropical costCost of sales increased to 33.4%31.3% in the third quarterfirst six months of 20112012 from 31.8%29.6% in the third quarterfirst six months of 2010 due primarily to higher commodity prices (1.9%), including chicken (0.8%) and fuel surcharges, partially offset by the effect of menu price increases. Pollo Tropical restaurant wages and related expenses decreased to 23.1% in the third quarter of 2011 from 24.1% in the third quarter of 2010 due primarily to the effect of higher sales volumes on fixed labor costs and lower restaurant-level bonus accruals (0.4%). Pollo Tropical other restaurant operating expenses were 13.3% in both the third quarter of 2011 and 2010 as the effect of higher sales volumes on fixed operating costs was offset by higher repairs and maintenance expense and higher store opening costs. Pollo Tropical advertising expense increased slightly to 3.7% in the third quarter of 2011 from 3.6% in the third quarter of 2010.Taco Cabana Operating Costs and Expenses (percentages stated as a percentage of Taco Cabana restaurant sales).Taco Cabana cost of sales increased to 31.2% in the third quarter of 2011 from 29.8% in the third quarter of 2010 due primarily to higher commodity prices including beef fajita meat (2.4%) partially offset by the effect of menu price increases taken in the last twelve months and favorable sales mix changes. Taco Cabana restaurant wages and related expenses decreased to 29.9% in the third quarter of 2011 from 30.5% in the third quarter of 2010 due primarily to the effect of higher sales volumes on fixed labor costs. Taco Cabana other restaurant operating expenses decreased to 14.1% in the third quarter of 2011 from 14.7% in the third quarter of 2010 due primarily to lower utility costs (0.2%), lower operating supply costs and the effect of higher sales volumes on other fixed operating costs. Taco Cabana advertising expense decreased to 3.7% in the third quarter of 2011 from 5.2% in the third quarter of 2010 due to the timing of promotions in the prior year.Burger King Operating Costs and Expenses (percentages stated as a percentage of Burger King restaurant sales).Burger King cost of sales increased to 29.7% in the third quarter of 2011 from 28.9% in the third quarter of 2010 due to higher commodity prices (2.7%(1.4%), including higher beef and pork prices (1.0%), higher sales discounts (0.7%). These factors were and lower vendor rebates (0.2%) partially offset by a favorable sales mix compared to the third quarterfirst six months of 2010 (1.1%), primarily2011 from the discontinuation of the Buck Double and the effect of menu price increases taken in the last twelve months. Burger King restaurant30.5%31.5% in the third quarterfirst six months of 2012 from 32.0% in the first six months of 2011 from 31.2% in the third quarter of 2010 due to leveraging management and productivethe effect of higher sales volumes on fixed labor efficiencies (0.9%)costs and lower restaurant level bonus accruals, partially offset by higher workers compensation claim costs (0.4%). Burger King otheraccruals.15.1%15.4% in the third quarterfirst six months of 20112012 from 15.5%15.6% in the third quarterfirst six months of 20102011 due primarily to lower utility costs (0.3%) and the effect of higher sales volumes on fixed operating costs partially offset by higher credit card fees (0.2%). Burger King advertisingwasdecreased to 3.5% in the first six months of 2012 from 4.2% in the bothfirst six months of 2011 due to the thirdadvertising credits received from BKC that were associated with 2012 menu enhancement initiatives. These credits were higher in the first quarter of 20112012 than the remaining three quarters in the year. For all of 2012 we anticipate advertising expense to range between 4.1% and 4.3% of 2010.Consolidated Restaurant Rent Expense. Restaurant rent expense, as a percentage of total restaurant sales, decreased to 5.8%6.6% in the third quarterfirst six months of 20112012 from 6.0%6.7% in the third quarterfirst six months of 20102011 due primarily to the effect of higher sales increases in the third quarter of 2011 at our Pollo Tropical and Taco Cabana restaurantsvolumes on fixed rental costs.Consolidated General and Administrative Expenses.General and administrative expenses increased $1.7$4.3 million in the third quarterfirst six months of 20112012 to $13.7$14.3 million and, as a percentage of total restaurant sales, increased to 6.5% compared to 6.0% in the third quarter of 20106.9% from 5.9%, due primarily to an increase of $1.1 million in performance-basedhigher administrative bonus accruals higher stock-basedcompensation expense of $0.3$1.0 million, and $0.2$1.2 million of legal and professional fees incurred in connectionother costs related to the acquisition of the acquired restaurants, $0.5 million of incremental field and corporate overhead costs associated with the planned spin-offacquired restaurants and $0.6 million of Fiesta Restaurant Group.Segment EBITDA.As a result of the factors set forth above Adjusted Segment EBITDA for our Pollo Tropical restaurants increased 2.3% to $8.6$11.7 million in the third quarterfirst six months of 20112012 from $7.5$11.4 million in the third quarterfirst six months of 2010. Adjusted Segment EBITDA for our Taco Cabana restaurants increased to $7.4 million in the third quarter of 2011 from $6.5 million in the third quarter of 2010. Adjusted Segment EBITDA for our Burger King restaurants decreased to $6.2 million in the third quarter of 2011 from $6.4 million in the third quarter of 2010.2011.Adjusted Segment EBITDA for our Burger King segment includes general and administrative expenses related directly to the Burger King segment as well as expenses associated with administrative support to our Pollo Tropical and Taco Cabana segments for executive management, information systems and certain accounting, legal and other administrative functions. For the third quarter of 2011, the administrative support expenses included in the Burger King segment provided to Pollo Tropical were $1.1 million and the administrative support expenses provided to Taco Cabana were $1.4 million. For the third quarter of 2010, these administrative support expenses included in the Burger King segment were $0.8 million for Pollo Tropical and $1.1 million for Taco Cabana.Amortization Expense.Amortization. Depreciation and amortization expense increased to $8.2$11.0 million in the third quarterfirst six months of 20112012 from $8.1$7.8 million in the third quarterfirst six months of 2010.2011 due primarily to the addition of the acquired restaurants and from point-of-sale systems installed at our legacy restaurants in 2012 and the second half of 2011.Charges. Charges. Impairment and other lease charges were $0.1 million in the third quarter consistedfirst six months of lease charges of $0.12012 compared to $1.0 million associated with the closure of a Pollo Tropical restaurant in the third quarterfirst six months of 2011 and $0.1 million of sublease income to reduce our future minimum lease payments and ancillary costs related to a non-operating Taco Cabana restaurant property.2011.increaseddecreased $1.1 million to $5.8$3.6 million in the third quarterfirst six months of 20112012 due to rate increases ona reduction in our senior secured credit facilities and a $35 million shift from senior term loan financing, which had a lower interest rate,total outstanding indebtedness compared to Fiesta Restaurant Group’s high-yield debt financing, all as a result of our refinancing activities in the third quarter of 2011. The weighted average interest rate on our long-term debt,increasedfor the first six months of 2012 was 6.5% compared to 7.4%6.3% in the third quarterfirst six months of 2011 from 6.1% in the third quarter of 2010. Interest expense on lease financing obligations was $0.3 million in the third quarter of 2011 and $0.2 million in the third quarter of 2010.ProvisionBenefit for Income Taxes.The provisionbenefit for income taxes for the thirdfirst six months of 2012 was derived using an estimated effective annual income tax rate for 2012 of 42.9%, which excluded discrete tax adjustments which reduced the benefit for income taxes $0.3 million in the first six months of 2012. The benefit for income taxes for the second quarter of 2011 was derived using an estimated effective annual income tax rate for 2011 of 30.1%76.6%, which excludes anyexcluded discrete tax adjustments. Discrete tax adjustments in the third quarter of 2011 decreasedwhich reduced the provision for income taxes by $0.1 million and resulted in an overall tax rate of 29.3%. The provision for income taxes for the third quarter of 2010 was derived using an estimated effective annual income tax rate for 2010 of 36.6%, which excluded any discrete tax adjustments. Discrete tax adjustments increased the provision for income taxes by $0.1 million in the third quarterfirst six months of 2010 and resulted in an overall tax rate of 37.8%.2011.Income.Income (loss) from Continuing Operations.As a result of the foregoing, net incomeloss from continuing operations was $3.4 million in the third quarter of 2011 compared to $4.6 million in the third quarter of 2010.Nine Months Ended September 30, 2011 Compared to Nine Months Ended September 30, 2010The following table sets forth, for the nine months ended September 30, 2011 and 2010, selected operating results as a percentage of consolidated restaurant sales: 2011 2010 25.4 % 23.2 % 32.4 % 31.6 % 42.2 % 45.2 % 100.0 % 100.0 % 31.1 % 30.4 % 29.0 % 29.6 % 5.9 % 6.1 % 14.1 % 14.5 % 3.8 % 3.9 % 6.7 % 6.2 % Since the beginning of 2010 through the third quarter of 2011, we have opened four new Pollo Tropical restaurants, five new Taco Cabana restaurants and three new Burger King restaurants. Two of the new Burger King restaurants were relocations within their market areas. During the same period we closed four Pollo Tropical restaurants, three Taco Cabana restaurants and eleven Burger King restaurants, excluding relocations,Restaurant Sales. Total restaurant sales in the first nine months of 2011 increased 2.9% to $617.6 million from $600.1$3.8 million in the first ninesix months of 2010. Restaurant sales for Fiesta Restaurant Group increased 8.6%2012 compared to $356.8 milliona net loss from $328.7continuing operations of $0.5 million in the first ninesix months of 2010.2011.Pollo Tropical restaurant sales in the first nine months2011 increased 12.7%EBITDA and Adjusted EBITDA to $156.5 million due primarily to an increase in comparable restaurant sales of 10.6% resulting from a 9.3% increase in customer traffic and a 1.3% increase in average check, compared to the first nine months of 2010. The effect of menu price increases in 2011 was 1.1%. In addition, four restaurants opened since the beginning of 2010 contributed $4.5 million in additional sales in the first nine months of 2011.Taco Cabana restaurant sales in the first nine months of 2011 increased 5.5% to $200.2 million due primarily to a 4.0% increase in comparable restaurant sales resulting from an increase in average check of 3.8% and an increase in customer traffic of 0.2%, compared to the first nine months of 2010. The effect of menu price increases in 2011 was 2.8%. In addition, five restaurants opened since the beginning of 2010 contributed $3.9 million in additional sales in the first nine months of 2011.Burger King restaurant sales in the first nine months of 2011 decreased 3.9% to $260.8 million due to a decrease in comparable restaurant sales of 2.3% from lower customer traffic and the closure, excluding relocations, of eleven Burger King restaurants since the beginning of 2010. In the first nine months of 2011, customer traffic decreased 9.1% and was partially offset by an increase in average check from sales mix changes and the effect of menu price increases in 2011 of 4.8%.Pollo Tropical Operating Costs and Expenses (percentages stated as a percentage of Pollo Tropical restaurant sales).Pollo Tropical cost of sales increased to 33.3% in the first nine months of 2011 from 32.3% in the first nine months of 2010 due primarily to higher commodity prices (1.4%), including chicken (0.8%) and fuel surcharges, partially offset by favorable menu item sales mix shifts and the effect of menu price increases. Pollo Tropical restaurant wages and related expenses decreased to 23.5% in the first nine months of 2011 from 24.6% in the first nine months of 2010 due primarily to the effect of higher sales volumes on fixed labor costs and lower workers compensation claim costs (0.3%). Pollo Tropical other restaurant operating expenses decreased to 12.7% in the first nine months of 2011 from 13.2% in the first nine months of 2010 due primarily to lower real estate taxes (0.4%) and the effect of higher sales volumes on other fixed operating costs. Pollo Tropical advertising expense decreased slightly to 2.7% in the first nine months of 2011 from 2.8% in the first nine months of 2010. For all of 2011 our Pollo Tropical advertising expenses are expected to be approximately 2.6% to 2.8% of Pollo Tropical restaurant sales.Taco Cabana Operating Costs and Expenses (percentages stated as a percentage of Taco Cabana restaurant sales).Taco Cabana cost of sales increased to 31.4% in the first nine months of 2011 from 29.9% in the first nine months of 2010 due primarily to higher commodity prices including beef fajita cost increases (2.0%) partially offset by the effect of menu price increases taken since the beginning of 2010. Taco Cabana restaurant wages and related expenses decreased to 30.1% in the first nine months of 2011 from 30.6% in the first nine months of 2010 due primarily to the effect of higher sales volumes on fixed labor costs and lower medical claim costs (0.2%). Taco Cabana other restaurant operating expenses decreased to 13.6% in the first nine months of 2011 from 14.4% in the first nine months of 2010 due primarily to lower utility costs (0.4%), the reduction of operating supply costs and the effect of higher sales volumes on other fixed operating costs. Taco Cabana advertising expense decreased to 4.1% in the first nine months of 2011 from 4.3% in the first nine months of 2010 due to the timing of promotions. For all of 2011 our Taco Cabana advertising expenses are expected to be approximately 3.9% to 4.1% of Taco Cabana restaurant sales.Burger King Operating Costs and Expenses (percentages stated as a percentage of Burger King restaurant sales).Burger King cost of sales was 29.7% in the both the first nine months of 2011 and 2010 as increases in commodity costs and higher promotional discounting were offset by the effect of menu price increases and a favorable sales mix as discussed above. Burger King restaurant wages and related expenses decreased to 31.4% in the first nine months of 2011 from 31.5% in the first nine months of 2010 due to the leveraging of productive labor efficiencies being substantially offset by the effect of lower sales volumes on fixed labor costs and higher workers compensation and medical claim costs (0.4%). Burger King other restaurant operating expenses increased to 15.4% in the first nine months of 2011 from 15.2% in the first nine months of 2010 due primarily to the effect of lower sales volumes on fixed operating costs. Burger King advertising expense was 4.2% in both the first nine months of 2011 and 2010. For all of 2011 our Burger King advertising expenses are expected to be approximately 4.1% to 4.3% of Burger King restaurant sales.Consolidated Restaurant Rent Expense. Restaurant rent expense, as a percentage of total restaurant sales, decreased to 5.9% in the first nine months of 2011 from 6.1% in the first nine months of 2010 due primarily to the effect of sales increases at our Pollo Tropical and Taco Cabana restaurants on fixed rental costs.Consolidated General and Administrative Expenses. General and administrative expenses increased $4.1 million in the first nine months of 2011 to $41.3 million and, as a percentage of total restaurant sales, increased to 6.7% from 6.2% in the first nine months of 2010 due primarily to an increase of $2.1 million in performance-based administrative bonus accruals, higher stock-based compensation expense of $0.9 million, higher legal and professional fees of $0.9 million including $0.7 million incurred in connection with the planned spin-off of Fiesta Restaurant Group.Adjusted Segment EBITDA.As a result of the factors above, Adjusted Segment EBITDA for our Pollo Tropical restaurants increased to $28.2 million in the first nine months of 2011 from $22.4 million in the first nine months of 2010. Adjusted Segment EBITDA for our Taco Cabana restaurants increased to $20.8 million in the first nine months of 2011 from $20.1 million in the first nine months of 2010. Adjusted Segment EBITDA for our Burger King restaurants decreased to $12.4 million in the first nine months of 2011 from $15.7 million in the first nine months of 2010.Adjusted Segment EBITDA for our Burger King segment includes general and administrative expenses related directly to the Burger King segment as well as expenses associated with administrative support to our Pollo Tropical and Taco Cabana segments for executive management, information systems and certain accounting, legal and other administrative functions. For the first nine months of 2011, the administrative support expenses included in the Burger King segment provided to Pollo Tropical were $3.3 million and the administrative support expenses provided to Taco Cabana were $4.2 million. For the first nine months of 2010, these administrative support expenses included in the Burger King segment were $2.8 million for Pollo Tropical and $3.6 million for Taco Cabana.Depreciation and Amortization.Depreciation and amortization expense increased to $24.7 million in the first nine months of 2011 from $24.3 million in the first nine months of 2010.Impairment and Other Lease Charges. Impairment and other lease charges in the first nine months of 2011, in addition to the third quarter items discussed above, consisted of $1.0 million of impairment charges for underperforming Burger King restaurants, $0.6 million in other lease charges for two previously closed Pollo Tropical restaurants, $0.3 million of lease charges for a Taco Cabana restaurant that was closed in the second quarter of 2011, and $0.2 million in lease charges for two previously closed Taco Cabana restaurants.Impairment and other lease charges in the first nine months of 2010 consisted of $1.4 million for an underperforming Pollo Tropical restaurant, $0.3 million to reduce the fair market value of a previously impaired Pollo Tropical restaurant, impairment charges of $1.1 million for an underperforming Taco Cabana restaurant, $0.3 million to reduce the fair market value of a previously impaired Taco Cabana restaurant and $0.4 million of impairment charges associated with three underperforming Burger King restaurants.Interest Expense. Total interest expense increased $0.8 million to $14.9 million in the first nine months of 2011 due to refinancing our indebtedness in the third quarter of 2011. The weighted average interest rate on our long-term debt, excluding lease financing obligations, for the first nine months of 2011 was 6.7% compared to 6.0% in the first nine months of 2010. Interest expense on lease financing obligations was $0.8 million in the first nine months of 2011 and $0.7 in the first nine months of 2010.Provision for Income Taxes. The provision for income taxes for the first nine months of 2011 was derived using an estimated effective annual income tax rate of for the year ending December 31, 2011 of 30.1%. Discrete tax adjustments reduced the provision for income taxes by $0.3 million in the first nine months of 2011 and resulted in an overall tax rate of 28.1%. The provision for income taxes for the first nine months of 2010 was derived using an estimated effective annual income tax rate for the year ending December 31, 2010 of 36.6%. Including discrete tax adjustments in the first nine months of 2010, the overall tax rate was 36.9%.Net Income.As a result of the foregoing, net income was $11.2 million in the first nine months of 2011 compared to $9.3 million in the first nine months of 2010. Three Months Ended Six Months Ended July 1, 2012 July 3, 2011 July 1, 2012 July 3, 2011 Net income (loss) from continuing operations $ (918 ) $ 300 $ (3,821 ) $ (532 ) Provision (benefit) for income taxes (2,782 ) 676 (2,273 ) (2,041 ) Interest expense 2,640 2,328 3,555 4,689 Depreciation and amortization 6,346 3,959 11,039 7,788 EBITDA 5,286 7,263 8,500 9,904 Impairment and other lease charges 101 155 127 971 Acquisition expenses 836 — 1,247 — Stock-based compensation expense 177 266 279 522 Loss on extinguishment of debt 1,509 — 1,509 — Adjusted EBITDA $ 7,909 $ 7,684 $ 11,662 $ 11,397 Since 2009, we have limited our spending on new restaurant development in order to utilize our free cash flow to reduce our outstanding indebtedness and our financial leverage. We have continued to moderate new restaurant growth in 2011.August 5, 2011, we completed a refinancing of our existing indebtedness.May 30, 2012, Carrols LLC and Fiesta Restaurant Group each entered into new and independent financing arrangements. The proceedsissued $150.0 million of Notes pursuant to an indenture dated as of May 30, 2012 governing such Notes. Proceeds from these financingsthe issuance of the Notes were used to repay amounts outstanding under Carrols’ senior credit facility and the Carrols Notes, as well as to pay accrued interest and all related fees and expenses. Excess cash generated from the financings was approximately $9.5 million.Fiesta Restaurant Group sold $200$64.8 million of 8.875% Senior Secured Second Lien Notes due 2016 and entered into a $25 million senior secured revolving credit facility which was undrawn at closing.borrowings under the prior Carrols LLC entered into an $85 million secured credit facility including term loan borrowings of $65 million and an undrawn $20 million revolving credit facility. Proceeds from these borrowings were used to repay approximately $80.2 million outstanding under Carrols’ senior credit facility, to repurchase $118.4pay $12.0 million of the Carrols Notes tendered pursuant to a cash tender offer (which ended August 18, 2011), and to pay accrued interest and related fees and expenses. In addition, the $46.6 million of Carrols Notes not tendered were repurchased upon completion of the cash tender offer or redeemed subsequent to its expiration along with payment for accrued interest and fees related to the tender offer.borrowingrevolving credit borrowings under our revolvingsenior credit facilitiesfacility and proceeds from anticipatedany sale-leaseback transactions that we may choose to do will provide sufficient cash availability to cover our anticipated working capital needs, capital expenditures and debt service requirements for the next twelve months.ninesix months of 20112012 increased $9.7$2.2 million to $40.3$18.3 million, from $30.6 million incompared to the first ninesix months of 2010,2011, due primarily to a reduction in the changesdecrease in the components of net working capital including deferredof $5.9 million partially offset by a reduction of income taxes,from continuing operations of $7.3 million, and an increase in net income, adjusted for non-cash items including depreciation and amortization, impairment and other lease charges, loss on extinguishment of debt and stock-based compensation expense.$3.3 million.ninesix months of 20112012 and 2010 was $26.62011 were $47.3 million and $24.1$8.1 million, respectively. Capital expenditures are the largesta 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 Burger King franchise renewals; (3) other restaurant capital expenditures, which include capital maintenance expenditures for the ongoing reinvestment and enhancement of our restaurants;restaurants including expenditures in 2011 and 2012 to support BKC’s new menu enhancement initiatives; and (4) corporate and restaurant information systems, including expenditures of $8.2 million in 2011the first six months of 2012 for new point-of-sale systems for our Burger Kinglegacy restaurants. Pollo
Tropical Taco
Cabana Burger
King Other Consolidated $ 3,075 $ 6,932 $ 1,619 $ — $ 11,626 2,281 1,211 6,193 — 9,685 1,567 2,117 4,658 — 8,342 421 93 1,472 1,228 3,214 $ 7,344 $ 10,353 $ 13,942 $ 1,228 $ 32,867 2 4 2 8 $ 4,331 $ 3,183 $ 2,269 $ — $ 9,783 1,573 2,819 4,180 — 8,572 1,763 2,259 2,973 — 6,995 52 53 — 857 962 $ 7,719 $ 8,314 $ 9,422 $ 857 $ 26,312 — 1 1 2 Six Months Ended July 1, 2012 New restaurant development $ — Restaurant remodeling 6,556 Other restaurant capital expenditures (1) 2,015 Corporate and restaurant information systems 8,717 Total capital expenditures $ 17,288 Number of new restaurant openings — Six Months Ended July 3, 2011 New restaurant development $ 1,572 Restaurant remodeling 3,497 Other restaurant capital expenditures (1) 2,169 Corporate and restaurant information systems 1,431 Total capital expenditures $ 8,669 Number of new restaurant openings (2) 2 1) first ninesix months ofendedJuly 1, 2012 and July 3, 2011 and 2010,, total restaurant repair and maintenance expenses were approximately $14.1$4.6 million and $13.5$4.2 million, respectively.2) Includes a Burger King restaurant which was relocated within the same market area under a new franchise agreement. For 2011$49$40 million to $51$45 million, although the actual amount of capital expenditures may differ from these estimates. In 2011 we plan to have opened a total of six new Pollo Tropical and Taco Cabana restaurants, one new Burger King restaurant and a relocation of one Burger King restaurant, all of which were open at the end of the third quarter. Capital expenditures for all of 2011in 2012 are expected to include approximately $12 million to $13 million for the development of new restaurants and purchase of related real estate. Capital expenditures in 2011 also are expected to include expenditures of approximately $32$28 million to $33 million for remodeling more than 80 of our restaurants to the ongoing reinvestment in our three restaurant concepts for remodeling costs andBKC 20/20 image standard, capital maintenance expenditures of approximately $3 million and approximately $5$9 million of other expenditures, including our expenditures for new point-of-sale systems at our Burger King restaurants.sale-leaseback transactions$12.1 million of payments related to the cash purchase price of the acquired restaurants and $20.0 million for the cash collateral deposit related to our restaurantnew senior credit facility. Proceeds from sales of properties the net proceeds from which were $7.8 million and $5.9$2.1 million in the first ninesix months of 20112012 and 2010, respectively.$0.6 million in the first six months of 2011. The net proceeds from these sales in the first and second quarter of 2011 were used to reduce outstanding borrowings under Carrols’our prior Carrols LLC senior credit facility. In the first nine months of 2011 we purchased one restaurant property for $2.1 million for future sale in a sale-leaseback transaction. In the first nine months of 2010 we also purchased three of our restaurant properties for $3.7 million for future sales in sale-leaseback transactions.third quarterfirst six months of 2011, including our refinancing activities previously2012 was $70.3 million and included proceeds from the sale of the Notes discussed above, was $5.3net of related fees and expenses, of $144.6 million. Prior toTotal payments on the refinancing,prior Carrols LLC senior credit facility, including amounts paid in connection with the issuance of the Notes, totaled $67.4 million in the first ninesix months of 2011 we made scheduled principal payments under Carrols’ prior senior credit facility2012. Proceeds from stock option exercises and related income tax benefits, including tax benefits from the conversion of $7.0vested stock options to shares of our common stock, in connection with the spin-off, in the first six months of 2012, were $1.1 million. During the second quarterCash of 2011, we entered into a sale-leaseback transaction for a restaurant propertyFiesta that did not qualify for sale-leaseback accounting and the net proceeds of $1.7 million were recordedwas deconsolidated as a leaseresult of the spin-off included in our 2012 financing obligation. During the third quarter of 2011 the condition that precluded sale-leaseback accountingactivities was cured. In 2011 we also deferred $9.3 million of financing costs pertaining to our refinancing discussed above.$5.5 million.first ninesix months of 2010ended July 1, 2011 was $7.7$12.6 million, including totaldue to principal payments on our term loan under Carrols’Carrols' prior senior credit facility of $9.9$7.0 million and from cash of Fiesta that was deconsolidated as a result We also had net revolver borrowings of $2.3 million in the first nine months of 2010.NewCarrols Restaurant Group Senior Secured Credit Facilities.Second Lien Notes. On August 5, 2011 Fiesta Restaurant Group entered into a new first lien revolving credit facility providing for aggregate borrowingsMay 30, 2012, we issued $150.0 million of upthe Notes pursuant to $25.0 million (including $10.0 million available for lettersan indenture dated as of credit).May 30, 2012 governing such Notes. The senior secured credit facility also provides for incremental increases of up to $5.0 million, in the aggregate, to the revolving credit borrowings available under the facility,Notes mature and maturesare payable on February 5, 2016. Borrowings under the revolving credit facility bear interest at a per annum rate, at Fiesta Restaurant Group’s option, of either (all terms as defined in the Fiesta Restaurant senior secured credit facility):1) the Alternate Base Rate plus the applicable margin of 2.0% to 2.75% basedMay 15, 2018. Interest is payable semi-annually on Fiesta Restaurant Group’s Adjusted Leverage Ratio (with an initial applicable margin set at 2.5% until the delivery of financial statements for the fourth fiscal quarter of 2011 to the agentMay 15 and lenders under the Fiesta Restaurant Group senior secured credit facility), or2) the LIBOR Rate plus the applicable margin of 3.0% to 3.75% based on Fiesta Restaurant Group’s Adjusted Leverage Ratio (with an initial applicable margin set at 3.5% until the delivery of financial statements for the fourth fiscal quarter of 2011 to the agentNovember 15, beginning November 15, 2012. The Notes are guaranteed by our material subsidiaries and lenders under the Fiesta Restaurant Group senior secured credit facility).Fiesta Restaurant Group’s obligations under the Fiesta Restaurant Group secured credit facility are secured by a first priority liensecond-priority liens on substantially all of theours and our material subsidiaries' assets of Fiesta Restaurant Group and its material subsidiaries, as guarantors, (including a pledge of all of the capital stock and equity interests of its material subsidiaries). Fiesta Restaurant Group senior secured senior credit facility contains customary default provisions, including without limitation, a cross default provision pursuant to which it is an event of default under this facility if there is a default under any indebtedness of Fiesta Restaurant Group having an outstanding principal amount of $2.5 million or more which results in the acceleration of such indebtedness prior to its stated maturity or is caused by a failure to pay principal when due. As of October 2, 2011, Fiesta Restaurant Group was in compliance with the covenants under its senior secured credit facility. After reserving $7.6 million for letters of credit guaranteed by the facility, $17.4 million was available for borrowing at October 2, 2011.On August 5, 2011 Carrols LLC entered into a new senior secured credit facility, which provides for $65.0 million aggregate principal amount of term loan borrowings and a revolving credit facility which provides for aggregate borrowings of up to $20.0 million (including $10.0 million available for letters of credit) both maturing on August 5, 2016. The Carrols LLC secured credit facility also provides for incremental borrowing increases of up to $25 million, in the aggregate, to the revolving credit facility and term loan borrowings available under facility. Borrowings under the term loan and revolving credit borrowings under the facility bear interest at a per annum rate, at Carrols LLC’s option, of either (all terms as defined in the Carrols LLC senior secured credit facility):1) the Alternate Base Rate plus the applicable margin of 2.25% to 4.0% based on Carrols LLC’s Adjusted Leverage Ratio (with an initial applicable margin set at 2.75% until the delivery of financial statements for the fourth fiscal quarter of 2011 to the agent and lenders under the Carrols LLC senior secured credit facility), or2) the LIBOR Rate plus the applicable margin of 3.25% to 4.0% based on Carrols LLC’s Adjusted Leverage Ratio (with an initial applicable margin set at 3.75% until the delivery of financial statements for the fourth fiscal quarter of 2011 to the agent and lenders under the Carrols LLC senior secured credit facility).Under the Carrols LLC senior secured credit facility, Carrols LLC will be required to make mandatory prepayments of revolving credit facility borrowings and principal on term loan borrowings (i) annually in an amount equal to 50% to 100% of Excess Cash Flow (as defined in the Carrols LLC senior secured credit facility) based on Carrols LLC’s Adjusted Leverage Ratio and (ii) in the event of dispositions of assets, debt issuances and insurance and condemnation proceeds (all subject to certain exceptions). The term loan borrowings under the Carrols LLC senior secured credit facility are payable in consecutive quarterly principal payments of $1.625 million beginning on the last day of the fourth quarter of 2011 through the first quarter of 2016 with the remaining outstanding principal amount of $35.75 million due on the maturity date of August 5, 2016.Carrols LLC’s obligations under the Carrols LLC senior secured credit facility are secured by a first priority lien on substantially all of the assets of Carrols LLC and by a pledge by Carrols of all of the outstanding equity interests of Carrols LLC.The Carrols LLC secured senior credit facility contains customary default provisions, including without limitation, a cross default provision pursuant to which it is an event of default under this facility if there is a default under any indebtedness of Carrols LLC having an outstanding principal amount of $2.5 million or more which results in the acceleration of such indebtedness prior to its stated maturity or is caused by a failure to pay principal when due. As of October 2, 2011, Carrols LLC was in compliance with the covenants under its senior secured credit facility. After reserving $5.9 million for letters of credit guaranteed by the facility, $19.1 million was available for borrowing at October 2, 2011.Fiesta Restaurant Group Senior Secured Second Lien Notes.On August 5, 2011, Fiesta Restaurant Group issued $200.0 million of 8.875% Senior Secured Second Lien Notes due 2016 pursuant to an indenture dated as of August 5, 2011 governing such notes. The Fiesta Notes mature and are payable on August 15, 2016. Interest is payable semi-annually on February 15 and August 15 with the first interest payment due on February 15, 2012. The Fiesta Notes are secured by second-priority liens on substantially all of Fiesta Restaurant Group’s and its material subsidiaries’ assets.The Fiesta Notes are redeemable at theour option of Fiesta Restaurant Group in whole or in part at any time after FebruaryMay 15, 20142015 at a price of 104.438%105.625% of the principal amount plus accrued and unpaid interest, if any, if redeemed before FebruaryMay 15, 2015, 102.219%2016, 102.813% of the principal amount plus accrued and unpaid interest, if any, if redeemed after FebruaryMay 15, 20152016 but before FebruaryMay 15,2016 2017 and 100% of the principal amount plus accrued and unpaid interest, if any, if redeemed after FebruaryMay 15, 2016.2017. Prior to February 14, 2014, Fiesta Restaurant GroupMay 15, 2015, we may redeem some or all of the Fiesta 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, at any time prior to February 15, 2014, Fiesta Restaurant Groupthe indenture governing the Notes also provides that we may redeem up to 35% of the Fiesta Notes withusing the net cash proceeds from specifiedof certain equity offerings at a redemption price equal to 108.875%completed before May 15, 2015.principal amount of each noteguarantor subsidiaries to be redeemed, plus accrued and unpaid interest, if any, to the date of redemption. Fiesta Notes includes certain covenants, including limitations and restrictions on Fiesta Restaurant Groupour and itsour material subsidiaries who are guarantors under such indenture to, among other things: incur additional debt,indebtedness or issue preferred stock,stock; incur liens; pay dividends or make distributions in respect of capital stock or make certain other restricted payments or investments, incur liens,investments; sell assets, enter into transactions with affiliates,assets; agree to payment restrictions affecting certain of its material subsidiaries andsubsidiaries; enter into mergers, consolidationstransaction with affiliates; or sales of allmerge, consolidate or sell substantially all of Fiesta Restaurant Group’s or its material subsidiaries’our assets. These covenants are subject to certain exceptions and qualifications including, without limitation, permitting the spin-off transaction discussed in Note 1.FiestaNotes and the security agreement provide that any capital stock and equity interests of any ofnotesNotes and the indenture governing the Notes if there is a default under any indebtedness of Fiesta Restaurant Groupours having an outstanding principal amount of $15.0 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. At October 2, 2011 Fiesta Restaurant Group wasWe were in compliance as of July 1, 2012 with the restrictive covenants contained inof the indenture governing the Fiesta Notes.PriorRestaurant Group Senior Credit Facility.Carrols’ priorOn May 30, 2012, we entered into a new senior credit facility, totaled $185 million, originally consisting of $120 million principal amount of term loan A borrowings and a $65.0 millionwhich provides for aggregate revolving credit borrowings of up to $20.0 million (including $15.0 million available for letters of credit) maturing on May 30, 2017. The senior credit facility (including a sub limitalso provides for incremental borrowing increases of up to $25.0 million, in the aggregate.$5.0$20.0 million (including $10.0 million available for swingline loans),letters of credit) both maturing on March 8, 2012.August 5, 2016.Carrols Prior Senior Subordinated Notes.Carrols’ prior senior subordinated notes consisted of issued $180 million of 9% Senior Subordinated Notes due 2013 that bore interest at a rate of 9% payable semi-annually on January 15 and July 15 and matured on January 15, 2013.Indebtedness. At October 2, 2011, we had total debt outstanding (including current portion) of 200.0 million of the Fiesta Notes, $65.0 million of outstandingsecured credit facility $10.1 millionwere payable in consecutive quarterly principal payments of lease financing obligations$1.625 million. All outstanding borrowings and $1.2 millionaccrued interest under the prior Carrols LLC senior credit facility were paid off in connection with the issuance of capital lease obligations.September 30, 2011July 1, 2012 (in thousands): Payments due by period Total Less than
1 Year 1 - 3
Years 3 - 5
Years More than
5 Years $ 362,072 $ 26,503 $ 52,225 $ 283,344 $ — 2,044 131 297 271 1,345 537,601 50,110 94,982 86,962 305,547 19,906 966 1,961 2,027 14,952 $ 921,623 $ 77,710 $ 149,465 $ 372,604 $ 321,844 Payments due by period Contractual Obligations Total Less than 1 Year 1 - 3 Years 3 - 5 Years More than 5 Years Long-term debt obligations, including interest(1) $ 242,110 $ 16,172 $ 33,750 $ 33,750 $ 158,438 Capital lease obligations, including interest(2) 14,290 1,734 3,476 3,476 5,604 Operating lease obligations(3) 459,979 44,472 81,795 71,518 262,194 Lease financing obligations, including interest(4) 2,342 101 205 209 1,827 Total contractual obligations $ 718,721 $ 62,479 $ 119,226 $ 108,953 $ 428,063 (1) Our long term debt at July 1, 2012 included $200.0$150.0 million of Fiesta Notes and $65.0 million of Carrols LLC term loan borrowings.Notes. Total interest payments on our Fiesta Notes of $87.5$92.1 million for all yearyears presented are included at the coupon rate of 8.875%. Total interest payments included above of $9.6 million for all years presented on our Carrols LLC term loan under its senior secured credit facility are variable in nature and have been calculated using an assumed effective interest rate of 4.0% for each year. (See Item 3 -Quantitative and Qualitative Disclosures about Market Risk – Interest Rate Risk)11.25%.(2) Includes total interest of $0.9$3.4 million in total for all years presented.(3) Represents the aggregate minimum lease payments under operating leases. Many of our leases also require contingent rent based on a percentage of sales in addition to the minimum base rent on a percentage of sales and require expenses incidental to the use of the property all of which arehave been excluded from this table.(4) Includes total interest of $9.8$1.1 million for all years presented.December 31, 2010.January 1, 2012, as amended. 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 31, 2010 during the nine months ended September 30, 2011.January 1, 2012, as amended.Early adoption is permitted, provided that the entity has not yet performed its 2011 annual impairment test or issued its financial statements. We are evaluating the impact of this guidance on itsour annual testing for goodwill impairment.In September 2011, the FASB issued guidance on the presentation of comprehensive income. This guidance eliminates the current option to report other comprehensive income and its components in the statement of changes in equity. The guidance allows two presentation alternatives: (1) to present items of net income and other comprehensive income in one continuous statement; or (2) in two separate, but consecutive, statements of net income and other comprehensive income. This guidance is effective as of the beginning of a fiscal year that begins afterimpairment at December 15, 2011. Early adoption is permitted, but full retrospective application is required. We are in the process of deciding which alternative we will choose upon adoption.amended.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 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 QuarterlyAnnual Report on Form 10-Q10-K for the quarterfiscal year ended July 3, 2011:•The effect of the proposed tax-free spin-off by Carrols Restaurant Group of Fiesta Restaurant Group, Inc. ;•The potential tax liability associated with the proposed tax-free spin-off of Fiesta Restaurant Group;•Increases in food costs;•Competitive conditions;•Regulatory factors;•Environmental conditions and regulations;•General economic conditions, particularly in the retail sector;•Weather conditions;•Increases in commodity costs;•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;•The outcome of pending or future legal claims and proceedings;•Our ability to manage our growth and successfully implement our business strategy ;•The risks associated with the expansion of our business;•Our ability to integrate any businesses we acquire;•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 risk of an act of terrorism or escalation of any insurrection or armed conflict involving the United States or any other national or international calamity; and•Factors that affect the restaurant industry generally, including recalls if products become adulterated or misbranded, liability if product consumption causes injury, ingredient disclosure and labeling laws and regulations, reports of cases of “mad cow” disease and avian flu, and the possibility that consumers could lose confidence in the safety and quality of certain food products, as well as negative publicity regarding food quality, illness, injury or other health concerns.We are exposedJanuary 1, 2012, as amended, with respect to the Company’s market risk associated with fluctuations in interest rates, primarily limited to our senior secured credit facilities. At September 30, 2011, there were $65.0 million of Carrols LLC term loan borrowings outstanding under its senior secured credit facility. Borrowings under the term loan and revolving credit borrowings under the Carrols LLC senior secured credit facility bear interest at a per annum rate, at Carrols LLC’s option, of either (all terms as defined in the Carrols LLC senior secured credit facility):1) the Alternate Base Rate plus the applicable margin of 2.25% to 4.0% based on Carrols LLC’s Adjusted Leverage Ratio (with an initial applicable margin set at 2.75% until the delivery of financial statements for the fourth fiscal quarter of 2011 to the agent and lenders under the Carrols LLC senior secured credit facility), or2) the LIBOR Rate plus the applicable margin of 3.25% to 4.0% based on Carrols LLC’s Adjusted Leverage Ratio (with an initial applicable margin set at 3.75% until the delivery of financial statements for the fourth fiscal quarter of 2011 to the agent and lenders under the Carrols LLC senior secured credit facility).Borrowings under the Fiesta Restaurant Group senior secured credit facility bear interest at a per annum rate, at our option, of either (all terms as defined in the Fiesta Restaurant senior secured credit facility):1) the Alternate Base Rate plus the applicable margin of 2.0% to 2.75% based on Fiesta Restaurant Group’s Adjusted Leverage Ratio (with an initial applicable margin set at 2.5% until the delivery of financial statements for the fourth fiscal quarter of 2011 to the agent and lenders under the Fiesta Restaurant Group senior secured credit facility), or2) the LIBOR Rate plus the applicable margin of 3.0% to 3.75% based on Fiesta Restaurant Group’s Adjusted Leverage Ratio (with an initial applicable margin set at 3.5% until the delivery of financial statements for the fourth fiscal quarter of 2011 to the agent and lenders under the Fiesta Restaurant Group senior secured credit facility).$0.6$0.1 million and $0.1 million for the ninethree and six months ended September 30, 2011.July 1, 2012.October 2, 2011.thirdsecond quarter of 20112012 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.Part II-Item 1A of our10-Q for10-Q. Any of the quarter ended July 3, 2011 describes important factors thatfollowing risks could materially adversely affect our business, consolidated financial condition or results of operations or causeoperations.differchange our pricing and other marketing strategies.indicatedlocations.suggestedother costs) or where the perceived wealth of customers has decreased (because of circumstances such as lower residential real estate values, increased foreclosure rates, increased tax rates or other economic disruptions), our restaurants have in the past experienced, and may in the future experience, lower sales and customer traffic as customers choose lower-cost alternatives or choose alternatives to dining out. The resulting decrease in our customer traffic or average sales per transaction has had an adverse effect in the past, and could in the future have a material adverse effect, on our business.forward-looking statementsgovernmental agencies or courts of law, as well as investigatory or remedial liabilities and claims for alleged personal injury orthis Form 10-Q or presented elsewhereconnection with obtaining such private letter ruling, including with respect to post-spin-off operations and conduct of the parties. Also, as part of the IRS's general policy with respect to rulings on spin-off transactions under Section 355 of the Code, the private letter ruling we obtained is based upon representations by management from time-to-time. Thereus that certain conditions which are necessary to obtain tax-free treatment under the Code have been nosatisfied, rather than a determination by the IRS that these conditions have been satisfied. Failure to satisfy such necessary conditions, or any inaccuracy in any representations made by us in connection with the ruling, could invalidate the ruling.changesinformation, covenant, or representation made in connection with the private letter ruling obtained by us from the risk factors previously disclosedIRS or otherwise cause the spin-off or the transfer to Fiesta of assets and the assumption by Fiesta of liabilities in connection with the spin-off to be subject to tax. Further, the tax matters agreement provides that we will be responsible for 50% of the losses and taxes of Carrols Restaurant Group and our affiliates and Fiesta and its affiliates resulting from the spin-off or the related transfer of assets and assumption of liabilities that are not attributable to any such action of ours or an equivalent action by Fiesta and its affiliates.Quarterly Reportstock ownership during the four-year period beginning on Form 10-Qthe date that begins two years before the spin-off, unless it is established that the transaction is not pursuant to a plan related to the spin-off. United States Treasury Regulations generally provide that whether an acquisition of our stock and a spin-off are part of a plan is determined based on all of the facts and circumstances, including specific factors listed in the regulations. In addition, the regulations provide certain “safe harbors” for acquisitions of our stock that are not considered to be part of a plan related to the spin-off.quarter ended two-year period following the spin-off, we agreed not to: (1) enter into, approve, agree to enter into, or substantially negotiate any transaction or series of transactions (in whatever form) resulting in a greater than 45% change in ownership of the vote or value of our equity or the equity of the surviving or successor entity, (2) merge, consolidate, liquidate, or partially liquidate Carrols Restaurant Group or any of the entities conducting the business relied upon in the IRS ruling as the “active business” of Carrols Restaurant Group, (3) permit the termination, sale, or transfer of, or a material change in, the business relied upon in the IRS ruling as the “active business” of Carrols Restaurant Group or the sale, issuance, or other disposition of the equity of the entities conducting such business, (4) sell or otherwise dispose of assets in a way that would adversely affect tax-free status, (5) repurchase any of our stock except in circumstances permitted by IRS guidelines, or (6) take any actions inconsistent with the representations or covenants in the IRS ruling request, inconsistent with the ruling or tax opinion, or that would be reasonably likely to otherwise jeopardize tax-free status.3, 2011.Item 2.Unregistered Sales of Equity Securities and Use of ProceedsExhibitNo. 10.1 Form of Employment Agreement among Carrols Restaurant Group, Inc., Carrols LLC and Daniel T. Accordino.+ 10.2 Letter dated as of November 1, 2011 between Carrols Restaurant Group, Inc. and Alan Vituli.+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. 99.1 The unaudited consolidated balance sheets as of October 2, 2011 and January 2, 2011 and the unaudited consolidated statements of operations for the three and nine months ended October 2, 2011 and cash flows for the nine months ended October 2, 2011 and accompanying financial statement footnotes of Fiesta Restaurant Group, Inc. 99.2Management’s Discussion and Analysis of Financial Condition and Results of Operations for the three and nine months ended October 2, 2011 of Fiesta 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 Exhibit No. *101.PRE XBRL Taxonomy Extension Presentation Linkbase Document +Management contract or compensatory plan or arrangement identified pursuant to this report.*As provided in Rule 406T of Regulation S-T, this information is deemed furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933, as amended, and Section 18 of the Securities Exchange Act of 1934, as amended. CARROLS RESTAURANT GROUP, INC. Date: November 14, 2011August 10, 2012 (Signature) /S/ ALAN VITULI (Signature)Alan VituliChairman of the Board andNovember 14, 2011 (Signature) /S/ PAUL R. FLANDERS (Signature)36