Carrols 10-Q 2003 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

x Quarterly report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2002

or

¨ Transition report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934

Commission File Number

0-25629

CARROLS CORPORATION

(Exact name of registrant as specified in its charter)

Delaware	16-0958146
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)
968 James Street Syracuse, New York	13203
(Address of principal executive offices)	(Zip Code)

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

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12(b)-2 of The Exchange Act). Yes¨  Nox

Common stock, par value $1.00, outstanding at November 11, 2002:10 shares

PART I

ITEM 1—FINANCIAL INFORMATION

CARROLS CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands of dollars)

	September 30, 2002		December 31, 2001
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	1,796	$	2,405
Trade and other receivables, net of reserves of $128 at each date		1,168		1,741
Inventories		4,757		5,094
Prepaid rent		2,083		2,115
Prepaid expenses and other current assets		4,002		4,262
Refundable income taxes		122		1,133
Deferred income taxes		6,797		6,797
Total current assets		20,725		23,547
Property and equipment, at cost less accumulated depreciation of $142,987 and $124,744, respectively		224,808		213,346
Franchise rights, at cost less accumulated amortization of $46,704 and $43,341, respectively		91,660		94,844
Intangible assets, at cost less accumulated amortization of $10,052 and $10,056, respectively		122,394		122,433
Deferred income taxes		3,844		8,384
Other assets		10,488		11,449
Total assets	$	473,919	$	474,003

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

2

CARROLS CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (continued)

(in thousands of dollars)

	September 30, 2002			December 31, 2001
	(unaudited)
LIABILITIES and STOCKHOLDER’S EQUITY
Current liabilities:
Accounts payable	$	13,617		$	16,620
Accrued interest		5,451			1,518
Accrued payroll, related taxes and benefits		15,011			12,872
Other liabilities		16,090			15,706
Current portion of long-term debt		11,828			10,029
Total current liabilities		61,997			56,745
Long-term debt, net of current portion		349,788			363,615
Deferred income—sale/leaseback of real estate		4,847			3,881
Accrued postretirement benefits		2,537			2,310
Other liabilities		30,467			32,397
Total liabilities		449,636			458,948
Stockholder’s equity:
Common stock, par value $1; authorized 1,000 shares, issued and outstanding—10 shares		—			—
Additional paid-in capital		24,485			24,485
Accumulated deficit		(202	)		(9,430	)
Total stockholder’s equity		24,283			15,055
Total liabilities and stockholder’s equity	$	473,919		$	474,003

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

3

CARROLS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

THREE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001

(in thousands of dollars)

	2002		2001
	(unaudited)
Revenues:
Restaurant sales	$	167,196	$	170,132
Franchise fees and royalty revenues		384		399
Total revenues		167,580		170,531
Costs and expenses:
Cost of sales		46,571		50,524
Restaurant wages and related expenses		49,904		48,998
Other restaurant operating expenses		32,467		32,718
Advertising expense		7,915		8,176
General and administrative		8,921		8,714
Depreciation and amortization		9,980		10,971
Total operating expenses		155,758		160,101
Income from operations		11,822		10,430
Interest expense		6,839		8,046
Income before income taxes		4,983		2,384
Provision for income taxes		1,793		1,964
Net income	$	3,190	$	420

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

4

CARROLS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001

(in thousands of dollars)

	2002		2001
	(unaudited)
Revenues:
Restaurant sales	$	497,658	$	491,493
Franchise fees and royalty revenues		1,102		1,187
Total revenues		498,760		492,680
Costs and expenses:
Cost of sales		138,829		143,952
Restaurant wages and related expenses		147,701		143,582
Other restaurant operating expenses		96,675		95,760
Advertising expense		21,968		21,553
General and administrative		28,204		26,358
Depreciation and amortization		29,776		32,040
Total operating expenses		463,153		463,245
Income from operations		35,607		29,435
Interest expense		20,822		25,594
Income before income taxes		14,785		3,841
Provision for income taxes		5,554		3,097
Net income	$	9,231	$	744

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

5

CARROLS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001

(in thousands of dollars)

	2002			2001
	(unaudited)
Cash flows provided from operating activities:
Net income	$	9,231		$	744
Adjustments to reconcile net income to net cash provided from operating activities:
Depreciation and amortization		29,776			32,040
Deferred income taxes		4,540			1,089
Change in operating assets and liabilities		2,684			(477	)
Loss on disposal of property and equipment		35			—
Net cash provided from operating activities		46,266			33,396
Cash flows used for investing activities:
Capital expenditures:
New restaurant development		(19,219	)		(13,764	)
Restaurant remodeling		(11,198	)		(10,435	)
Other restaurant expenditures		(7,456	)		(7,573	)
Corporate and information systems		(1,124	)		(1,704	)
Acquisition of restaurants		—			(1,612	)
Total capital expenditures		(38,997	)		(35,088	)
Properties purchased for sale-leaseback		(925	)		—
Proceeds from sales of property and equipment		9			26
Net cash used for investing activities		(39,913	)		(35,062	)
Cash flows provided from (used for) financing activities:
Proceeds (payments) on revolving credit facility, net		(4,500	)		5,800
Proceeds (payments) on other notes payable, net		(726	)		358
Principal payments on term loans		(6,375	)		(5,250	)
Principal payments on capital leases		(427	)		(390	)
Proceeds from sale-leaseback transactions		5,066			—
Net cash provided from (used for) financing activities		(6,962	)		518
Decrease in cash and cash equivalents		(609	)		(1,148	)
Cash and cash equivalents, beginning of period		2,405			2,712
Cash and cash equivalents, end of period	$	1,796		$	1,564

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

6

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. Statement of Management

The accompanying unaudited consolidated financial statements as of September 30, 2002 and for the three and nine months ended September 30, 2002 and 2001 have been prepared without audit, pursuant to the rules and regulations of the Securities and Exchange Commission and do not include all of the information and the footnotes required by accounting principles generally accepted in the United States of America for complete statements. In the opinion of management, all normal and recurring adjustments necessary for a fair presentation of such financial statements have been included.

The results of operations for the three and nine months ended September 30, 2002 and 2001 are not necessarily indicative of the results to be expected for the full year.

The preparation of 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 date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

The consolidated financial statements include the accounts of Carrols Corporation and its subsidiaries (“Carrols” or the “Company”). All material intercompany balances, transactions and profits have been eliminated.

These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2001 contained in our 2001 Annual Report on Form 10-K. The December 31, 2001 balance sheet data is derived from these audited financial statements.

2. Intangible Assets

Intangible assets, net of accumulated amortization, consist of the following (in thousands):

	September 30, 2002		December 31, 2001
Goodwill	$	121,335	$	121,335
Trademarks		232		242
Other		827		866
	$	122,394	$	122,433

Amortization expense of goodwill, which is no longer amortized effective January 1, 2002, was $1,241,000 and $3,724,000 for the three and nine months ended September 30, 2001, respectively.

3. Income Taxes

The income tax provision for the nine months ended September 30, 2002 and 2001 was comprised of the following (in thousands):

	2002		2001
Current	$	1,014	$	2,008
Deferred		4,540		1,089
	$	5,554	$	3,097

7

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For 2002, the difference between the expected tax provision, resulting from application of the federal statutory income tax rate to pretax income, and the reported income tax provision results principally from state taxes and non-deductible amortization of certain franchise rights. For 2001, this difference is due to the same factors as well as the amortization of non-deductible goodwill.

4. Business Segment Information

The Company is engaged in the quick-service restaurant industry, with three restaurant concepts: Burger King operating as a franchisee, Pollo Tropical and Taco Cabana, both Company owned concepts. The Company’s Burger King restaurants are all located in the United States, primarily in the Northeast, Southeast and Midwest. Pollo Tropical is a regional quick-service restaurant chain featuring grilled marinated chicken and authentic “made from scratch” side dishes. Pollo Tropical’s company-owned restaurants are located in south and central Florida. Taco Cabana is a regional quick-service restaurant chain featuring Mexican style food, including flame-grilled beef and chicken fajitas, quesadillas and other Tex-Mex dishes. Taco Cabana’s company-owned restaurants are located in Texas and Oklahoma.

The “Other” column includes corporate related items not allocated to reportable segments, principally corporate depreciation and amortization. Other identifiable assets consist primarily of intangible assets.

	Burger King		Pollo Tropical		Taco Cabana		Other			Consolidated
Three Months Ended (dollars in thousands):
September 30, 2002:
Revenues	$	95,986	$	25,824	$	45,770	$	—		$	167,580
Cost of sales		25,351		7,859		13,361		—			46,571
Restaurant wages and related expenses		30,063		6,880		12,961		—			49,904
Depreciation and amortization		6,380		815		1,558		1,227			9,980
Income (loss) from operations		4,475		3,867		4,707		(1,227	)		11,822
Capital expenditures, excluding acquisitions		6,993		2,674		5,087		536			15,290
September 30, 2001:
Revenues	$	99,432	$	24,315	$	46,784	$	—		$	170,531
Cost of sales		28,936		7,786		13,802		—			50,524
Restaurant wages and related expenses		29,769		5,949		13,280		—			48,998
Depreciation and amortization		6,178		698		1,818		2,277			10,971
Income (loss) from operations		4,657		4,211		3,839		(2,277	)		10,430
Capital expenditures, excluding acquisitions		8,769		3,598		2,152		647			15,166

8

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

	Burger King		Pollo Tropical		Taco Cabana		Other			Consolidated
Nine Months Ended (dollars in thousands):
September 30, 2002:
Revenues	$	288,778	$	76,230	$	133,752	$	—		$	498,760
Cost of sales		76,502		23,130		39,197		—			138,829
Restaurant wages and related expenses		89,987		19,400		38,314		—			147,701
Depreciation and amortization		19,183		2,356		4,917		3,320			29,776
Income (loss) from operations		12,219		12,936		13,772		(3,320	)		35,607
Capital expenditures, excluding acquisitions		17,882		8,399		11,592		1,124			38,997
September 30, 2001:
Revenues	$	283,619	$	74,123	$	134,938	$	—		$	492,680
Cost of sales		81,078		23,688		39,186		—			143,952
Restaurant wages and related expenses		87,477		17,562		38,543		—			143,582
Depreciation and amortization		17,743		1,957		5,636		6,704			32,040
Income (loss) from operations		10,293		13,523		12,323		(6,704	)		29,435
Capital expenditures, excluding acquisitions		18,518		6,324		6,941		1,693			33,476
Identifiable Assets:
At September 30, 2002	$	211,586	$	37,820	$	67,275	$	157,238		$	473,919
At December 31, 2001		215,249		31,668		60,776		166,310			474,003

5. Other Expense

During the fourth quarter of 2001, management made the decision to close seven Taco Cabana restaurants in the Phoenix, Arizona market and discontinue restaurant development underway in that market. This decision resulted in a charge to other expense of $8.8 million in the fourth quarter, representing $7.1 million in asset impairments, primarily leasehold improvements, and $1.7 million in future occupancy costs and other ongoing exit activities estimated to be incurred over a two-year period. The Company closed one restaurant in December 2001 and the remaining six restaurants in February 2002. During the nine months ended September 30, 2002, the Company paid $0.5 million in lease liabilities for the closed restaurants and the remaining lease liability at September 30, 2002 was $0.5 million. The Company has also paid $0.4 million in the nine months ended September 30, 2002 pertaining to other exit costs resulting in a September 30, 2002 reserve balance of $0.3 million.

6. New Accounting Pronouncements

In July 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS 142, “Goodwill and Other Intangible Assets,” which supercedes Accounting Principles Board Opinion 17, “Intangible Assets.” Under SFAS 142, goodwill and intangible assets with indefinite lives are no longer amortized, effective January 1, 2002, but are to be tested at least annually for impairment. The Company will perform its impairment evaluation annually at December 31. Separable intangible assets with defined lives will continue to be amortized over their useful lives.

9

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

SFAS 142 also required the Company to complete Step 1 of a transitional goodwill impairment test by June 30, 2002. Step 1 required the comparison of the fair value of a reporting unit to its carrying value at January 1, 2002 to determine whether there is an indicated transitional goodwill impairment. Our evaluation of impairment under Step 1 of the transitional goodwill impairment test indicated that our reporting units’ fair values are above their carrying values at January 1, 2002, and that there is no transitional goodwill impairment charge required.

In June 2001, the FASB issued SFAS 143, “Accounting for Asset Retirement Obligations.” This new standard requires entities to recognize the fair value of an asset retirement obligation in the period which it is incurred if a reasonable estimate of fair value can be made. The provisions of SFAS 143 are effective for fiscal years beginning after June 15, 2002. We have determined the impact of adopting SFAS 143 to be immaterial on the Company’s financial statements.

In July 2002, the FASB issued SFAS 146, “Accounting for Costs Associated with Exit or Disposal Activities,” which nullifies Emerging Issues Task Force Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” The provisions of SFAS 146 are effective for exit or disposal activities initiated after December 31, 2002. Previously issued financial statements can not be restated under SFAS 146.

7. Guarantor Financial Statements

The $170 million senior subordinated notes of the Company are guaranteed by certain of the Company’s subsidiaries (“Guarantor Subsidiaries”), all of which are wholly-owned by the Company. These subsidiaries are:

Carrols Realty Holdings

Carrols Realty I Corp.

Carrols Realty II Corp.

Carrols J.G. Corp.

Quanta Advertising Corp.

Pollo Franchise, Inc.

Pollo Operations, Inc.

Taco Cabana, Inc.

TP Acquisition Corp.

T.C. Management, Inc.

Taco Cabana Management, Inc.

Get Real, Inc.

Texas Taco Cabana, L.P.

The following supplemental financial information sets forth on a consolidating basis, balance sheets, statements of operations and statements of cash flows for the Parent Company (Carrols Corporation) only, Guarantor Subsidiaries and for the Company as of September 30, 2002 and December 31, 2001 and for the three-month and nine-month periods ended September 30, 2002 and 2001. Debt and goodwill allocated to subsidiaries are presented on an “push-down” accounting basis.

10

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

CONSOLIDATING BALANCE SHEET

September 30, 2002

(in thousands of dollars)

(unaudited)

	Parent Company Only		Guarantor Subsidiaries			Combined Total
ASSETS
Current Assets:
Cash and cash equivalents	$	1,363	$	433		$	1,796
Trade and other receivables, net		232		936			1,168
Inventories		3,370		1,387			4,757
Prepaid rent		1,258		825			2,083
Prepaid expenses and other current assets		1,196		2,806			4,002
Refundable income taxes		122		—			122
Deferred income taxes		6,797		—			6,797
Total current assets		14,338		6,387			20,725
Property and equipment, net		116,369		108,439			224,808
Franchise rights, net		91,660		—			91,660
Intangible assets, net		1,535		120,859			122,394
Intercompany receivable (payable)		180,498		(180,498	)		—
Deferred income taxes		3,844		—			3,844
Other assets		7,988		2,500			10,488
Total assets	$	416,232	$	57,687		$	473,919
LIABILITIES AND STOCKHOLDER’S EQUITY
Current Liabilities:
Accounts payable	$	7,441	$	6,176		$	13,617
Accrued interest		5,451		—			5,451
Accrued payroll, related taxes and benefits		9,612		5,399			15,011
Other liabilities		7,444		8,646			16,090
Current portion of long-term debt		11,530		298			11,828
Total current liabilities		41,478		20,519			61,997
Long-term debt, net of current portion		348,827		961			349,788
Deferred income, sale/leaseback of real estate		4,847		—			4,847
Accrued postretirement benefits		2,537		—			2,537
Other liabilities		16,519		13,948			30,467
Total liabilities		414,208		35,428			449,636
Stockholder’s equity		2,024		22,259			24,283
Total liabilities and stockholder’s equity	$	416,232	$	57,687		$	473,919

11

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

CONSOLIDATING BALANCE SHEET

December 31, 2001

(in thousands of dollars)

	Parent Company Only		Guarantor Subsidiaries			Combined Total
ASSETS
Current Assets:
Cash and cash equivalents	$	921	$	1,484		$	2,405
Trade and other receivables, net		423		1,318			1,741
Inventories		3,572		1,522			5,094
Prepaid rent		1,260		855			2,115
Prepaid expenses and other current assets		1,435		2,827			4,262
Refundable income taxes		1,133		—			1,133
Deferred income taxes		6,797		—			6,797
Total current assets		15,541		8,006			23,547
Property and equipment, net		117,186		96,160			213,346
Franchise rights, net		94,844		—			94,844
Intangible assets, net		1,568		120,865			122,433
Intercompany receivable (payable)		181,226		(181,226	)		—
Deferred income taxes		8,384		—			8,384
Other assets		8,849		2,600			11,449
Total assets	$	427,598	$	46,405		$	474,003
LIABILITIES AND STOCKHOLDER’S EQUITY
Current Liabilities:
Accounts payable	$	10,118	$	6,502		$	16,620
Accrued interest		1,518		—			1,518
Accrued payroll, related taxes and benefits		8,278		4,594			12,872
Other liabilities		6,791		8,915			15,706
Current portion of long-term debt		9,762		267			10,029
Total current liabilities		36,467		20,278			56,745
Long-term debt, net of current portion		362,426		1,189			363,615
Deferred income, sale/leaseback of real estate		3,881		—			3,881
Accrued postretirement benefits		2,310		—			2,310
Other liabilities		16,705		15,692			32,397
Total liabilities		421,789		37,159			458,948
Stockholder’s equity		5,809		9,246			15,055
Total liabilities and stockholder’s equity	$	427,598	$	46,405		$	474,003

12

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

CONSOLIDATING STATEMENT OF OPERATIONS

Three Months Ended September 30, 2002

(in thousands of dollars)

(unaudited)

	Parent Company Only			Guarantor Subsidiaries		Combined Total
Revenues:
Restaurant sales	$	95,986		$	71,210	$	167,196
Franchise fees and royalty revenues		—			384		384
Total revenues		95,986			71,594		167,580
Costs and expenses:
Cost of sales		25,351			21,220		46,571
Restaurant wages and related expenses		30,063			19,841		49,904
Other restaurant operating expenses		20,247			12,220		32,467
Advertising expense		4,337			3,578		7,915
General and administrative		5,133			3,788		8,921
Depreciation and amortization		7,176			2,804		9,980
Total operating expenses		92,307			63,451		155,758
Income from operations		3,679			8,143		11,822
Interest expense		6,763			76		6,839
Intercompany allocations		(1,736	)		1,736		—
Income (loss) before income taxes		(1,348	)		6,331		4,983
Provision (benefit) for income taxes		(475	)		2,268		1,793
Net income (loss)	$	(873	)	$	4,063	$	3,190

13

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

CONSOLIDATING STATEMENT OF OPERATIONS

Three Months Ended September 30, 2001

(in thousands of dollars)

(unaudited)

	Parent Company Only			Guarantor Subsidiaries		Combined Total
Revenues:
Restaurant sales	$	99,432		$	70,700	$	170,132
Franchise fees and royalty revenues		—			399		399
Total revenues		99,432			71,099		170,531
Costs and expenses:
Cost of sales		28,936			21,588		50,524
Restaurant wages and related expenses		29,769			19,229		48,998
Other restaurant operating expenses		20,445			12,273		32,718
Advertising expense		4,429			3,747		8,176
General and administrative		5,018			3,696		8,714
Depreciation and amortization		6,946			4,025		10,971
Total operating expenses		95,543			64,558		160,101
Income from operations		3,889			6,541		10,430
Interest expense		7,880			166		8,046
Intercompany allocations		(1,737	)		1,737		—
Income (loss) before income taxes		(2,254	)		4,638		2,384
Provision (benefit) for income taxes		(173	)		2,137		1,964
Net income (loss)	$	(2,081	)	$	2,501	$	420

14

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

CONSOLIDATING STATEMENT OF OPERATIONS

Nine Months Ended September 30, 2002

(in thousands of dollars)

(unaudited)

	Parent Company Only			Guarantor Subsidiaries		Combined Total
Revenues:
Restaurant sales	$	288,778		$	208,880	$	497,658
Franchise fees and royalty revenues		—			1,102		1,102
Total revenues		288,778			209,982		498,760
Costs and expenses:
Cost of sales		76,502			62,327		138,829
Restaurant wages and related expenses		89,987			57,714		147,701
Other restaurant operating expenses		60,902			35,773		96,675
Advertising expense		12,731			9,237		21,968
General and administrative		17,254			10,950		28,204
Depreciation and amortization		21,563			8,213		29,776
Total operating expenses		278,939			184,214		463,153
Income from operations		9,839			25,768		35,607
Interest expense		20,582			240		20,822
Intercompany allocations		(5,208	)		5,208		—
Income (loss) before income taxes		(5,535	)		20,320		14,785
Provision (benefit) for income taxes		(1,753	)		7,307		5,554
Net income (loss)	$	(3,782	)	$	13,013	$	9,231

15

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

CONSOLIDATING STATEMENT OF OPERATIONS

Nine Months Ended September 30, 2001

(in thousands of dollars)

(unaudited)

	Parent Company Only			Guarantor Subsidiaries		Combined Total
Revenues:
Restaurant sales	$	283,619		$	207,874	$	491,493
Franchise fees and royalty revenues		—			1,187		1,187
Total revenues		283,619			209,061		492,680
Costs and expenses:
Cost of sales		81,078			62,874		143,952
Restaurant wages and related expenses		87,477			56,105		143,582
Other restaurant operating expenses		60,187			35,573		95,760
Advertising expense		12,007			9,546		21,533
General and administrative		14,834			11,524		26,358
Depreciation and amortization		20,034			12,006		32,040
Total operating expenses		275,617			187,628		463,245
Income from operations		8,002			21,433		29,435
Interest expense		25,151			443		25,594
Intercompany allocations		(5,211	)		5,211		—
Income (loss) before income taxes		(11,938	)		15,779		3,841
Provision (benefit) for income taxes		(3,846	)		6,943		3,097
Net income (loss)	$	(8,092	)	$	8,836	$	744

16

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

CONSOLIDATING STATEMENT OF CASH FLOWS

Nine Months Ended September 30, 2002

(in thousands of dollars)

(unaudited)

	Parent Company Only			Guarantor Subsidiaries			Combined Total
Cash flows provided from operating activities:
Net income (loss)	$	(3,782	)	$	13,013		$	9,231
Adjustments to reconcile net income (loss) to net cash provided from operating activities:
Loss on disposal of property and equipment		11			24			35
Depreciation and amortization		21,563			8,213			29,776
Deferred income taxes		4,540			—			4,540
Changes in operating assets and liabilities		4,202			(1,518	)		2,684
Net cash provided from operating activities		26,534			19,732			46,266
Cash flow used for investing activities:
Capital expenditures:
New restaurant development		(5,888	)		(13,331	)		(19,219	)
Restaurant remodeling		(7,918	)		(3,280	)		(11,198	)
Corporate and information systems		(530	)		(594	)		(1,124	)
Other restaurant expenditures		(4,076	)		(3,380	)		(7,456	)
Total capital expenditures		(18,412	)		(20,585	)		(38,997	)
Purchased properties for sale/leaseback		(925	)		—			(925	)
Proceeds from sales of property and equipment		9			—			9
Net cash used for investing activities		(19,328	)		(20,585	)		(39,913	)
Cash flows used for financing activities:
Payments on revolving credit facility, net		(4,500	)		—			(4,500	)
Principal payments on term loans		(6,375	)		—			(6,375	)
Payments on other notes payable, net		(726	)		—			(726	)
Principal payments on capital leases		(229	)		(198	)		(427	)
Proceeds from sale/leaseback transactions		5,066			—			5,066
Net cash used for financing activities		(6,764	)		(198	)		(6,962	)
Net increase (decrease) in cash and cash equivalents		442			(1,051	)		(609	)
Cash and cash equivalents, beginning of year		921			1,484			2,405
Cash and cash equivalents, end of period	$	1,363		$	433		$	1,796

17

CONSOLIDATING STATEMENT OF CASH FLOWS

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Nine Months Ended September 30, 2001

(in thousands of dollars)

(unaudited)

	Parent Company Only			Guarantor Subsidiaries			Combined Total
Cash flows provided from operating activities:
Net income (loss)	$	(8,092	)	$	8,836		$	744
Adjustments to reconcile net income (loss) to net cash provided from operating activities:
Depreciation and amortization		20,034			12,006			32,040
Deferred income taxes		(2,774	)		3,863			1,089
Changes in operating assets and liabilities		11,354			(11,831	)		(477	)
Net cash provided from operating activities		20,522			12,874			33,396
Cash flow used for investing activities:
Capital expenditures:
New restaurant development		(4,553	)		(9,211	)		(13,764	)
Restaurant remodeling		(9,832	)		603			(10,435	)
Corporate and information systems		(1,061	)		(643	)		(1,704	)
Other restaurant expenditures		(4,120	)		(3,453	)		(7,573	)
Acquisition of restaurants		(1,612	)		—			(1,612	)
Proceeds from dispositions of property and equipment		21			5			26
Net cash used for investing activities		(21,157	)		(13,905	)		(35,062	)
Cash flows provided from financing activities:
Proceeds from revolving credit facility, net		5,800			—			5,800
Proceeds from other notes payable, net		358			—			358
Principal payments on term loans		(5,250	)		—			(5,250	)
Principal payments on capital leases		(390	)		—			(390	)
Net cash provided from financing activities		518			—			518
Net decrease in cash and cash equivalents		(117	)		(1,031	)		(1,148	)
Cash and cash equivalents, beginning of year		785			1,927			2,712
Cash and cash equivalents, end of period	$	668		$	896		$	1,564

18

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

Certain statements included in this “Management’s Discussion and Analysis of Results of Operations and Financial Condition” and elsewhere in this Quarterly Report on Form 10-Q which are not statements of historical fact are intended to be, and are hereby identified as, “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Without limiting the foregoing, the words “believe,” “anticipate,” “plan,” “expect,” “estimate,” “intend,” and other similar expressions are intended to identify forward-looking statements. The Company cautions readers that forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievement expressed or implied by such forward-looking statements. Such factors include, among others, the following: the success or failure of the Company or Burger King Corporation in implementing its current business and operational strategies; availability, terms and access to capital and customary trade credit; general economic and business conditions; competition; changes in the Company’s business strategy; labor relations; the outcome of pending or yet-to-be instituted legal proceedings; labor and employee benefit costs; and availability and terms of necessary or desirable financing or refinancing.

Overview

We are one of the largest restaurant companies in the U. S. operating 530 restaurants in 16 states at September 30, 2002. We are the largest Burger King franchisee, and have operated Burger King restaurants since 1976. We also operate two regional Hispanic restaurant chains, Taco Cabana and Pollo Tropical, which operate or franchise more than 200 restaurants.

As of September 30, 2002, we operated 358 Burger King restaurants located in 13 Northeastern, Midwestern and Southeastern states. Since September 30, 2001 we have opened six additional Burger King restaurants and closed seven Burger King restaurants.

We have expanded our operations during the past four years through the acquisition of two regional quick-casual Hispanic restaurant chains. In 1998, we acquired Pollo Tropical Inc., a restaurant chain featuring grilled marinated chicken and authentic “made from scratch” side dishes. Since the acquisition we have opened 22 new Pollo Tropical restaurants and at September 30, 2002 we had 58 company owned Pollo Tropical restaurants in Florida and 23 franchised Pollo Tropical restaurants, 18 of which are in Puerto Rico.

In December 2000, we acquired Taco Cabana Inc., a restaurant chain featuring Tex-Mex style food including flame-grilled beef and chicken fajitas, quesadillas and fresh flour tortillas. As of September 30, 2002 we had 114 company owned Taco Cabana restaurants located primarily in Texas and 10 franchised Taco Cabana restaurants. In the fourth quarter of 2001, we decided to close seven restaurants in the Phoenix, Arizona market and discontinue restaurant development underway in that market. One Taco Cabana restaurant in Phoenix was closed in December 2001 and the six remaining Taco Cabana restaurants were closed in the first quarter of 2002. In addition since September 30, 2001, we have opened three new Taco Cabana restaurants and closed three under-performing Taco Cabana restaurants.

We use a 52-53 week fiscal year ending on the Sunday closest to December 31.

Significant Accounting Policies

Financial Reporting Release No. 60, which was released by the Securities and Exchange Commission in December 2001, proposes that all companies include a discussion of critical accounting policies or methods used in the preparation of financial statements. The following is a brief discussion of the more significant accounting policies and methods used by the Company.

19

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

RESULTS OF OPERATIONS AND FINANCIAL CONDITION—(Continued)

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make assumptions and estimates that can have a material impact on our results of operations. Sales recognition at company-operated restaurants is straightforward as customers pay for products at the time of sale and inventory turns over very quickly. Payments to vendors for products sold in the restaurants are generally settled within 30 days. The earnings reporting process is governed by our system of internal controls, and generally does not require significant management estimates and judgments. However, estimates and judgments are inherent in the assessment and recording of insurance liabilities, accrued occupancy costs, legal obligations, income taxes and the valuation of goodwill for impairment. While we base our judgments using assumptions believed to be reasonable under the circumstances, actual results could vary from these assumptions. It is possible that materially different amounts would be reported using different assumptions.

We are essentially self-insured, subject to certain limits for both specific and aggregate losses for most workers’ compensation, general liability and medical insurance claims. We record and monitor insurance liabilities based on our historical trends and industry factors, as appropriate, and adjust accruals as warranted by changing circumstances. Since there are many estimates and assumptions involved in recording these insurance liabilities, differences between actual future events and prior estimates and assumptions could result in adjustments to these liabilities.

We make estimates of accrued occupancy costs pertaining to closed restaurant locations on an ongoing basis. These estimates require assessment and continuous evaluation of a number of factors such as the remaining contractual period under our lease obligations, the amount of sublease income, if any; we are able to realize on a particular property and estimates of other costs such as property taxes. Differences between actual future events and prior estimates could result in adjustments to these accrued costs.

In the normal course of business, we must make estimates of potential future legal obligations and liabilities, which require the use of management’s judgment. Management may also consult with outside legal counsel to assist in the estimating process. However, the ultimate outcome of various legal issues could be different than management estimates, and adjustments to income could be required.

We record income tax liabilities utilizing known obligations and estimates of potential obligations. We are required to record a valuation allowance if the value of estimated deferred tax assets are different from those recorded. This includes making estimates and judgments on future taxable income, the consideration of feasible tax planning strategies and existing facts and circumstances. When the amount of deferred tax assets to be realized is different from that recorded, the asset balance and income statement would reflect the change in the period such determination is made.

We must evaluate our recorded goodwill for impairment under SFAS 142, “Goodwill and Other Intangible Assets,” on an annual basis. This annual evaluation requires us to make estimates and assumptions regarding the fair value of our reporting units. These estimates may differ from actual future events.

Recent Accounting Pronouncements

In July 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS 142, “Goodwill and Other Intangible Assets,” which replaces Accounting Principles Board Opinion 17, “Intangible Assets.” Under SFAS 142, goodwill and intangible assets with indefinite lives are no longer amortized, effective January 1, 2002, but are to be tested at least annually for impairment. Separable intangible assets with defined lives will continue to be amortized over their useful lives. Amortization expense of goodwill was $1,241,000 and $3,724,000 for the three and nine months ended September 30, 2001, respectively.

20

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

RESULTS OF OPERATIONS AND FINANCIAL CONDITION—(Continued)

SFAS 142 also required the Company to complete Step 1 of a transitional goodwill impairment test by June 30, 2002. Step 1 required the comparison of the fair value of a reporting unit to its carrying value at January 1, 2002 to determine whether there is an indicated transitional goodwill impairment. Our evaluation of impairment under Step 1 of the transitional goodwill impairment test indicated that our reporting units’ fair values are above their carrying values at January 1, 2002 and there is no transitional goodwill impairment charge required. On an ongoing basis, the Company has elected to conduct its annual impairment review of goodwill and intangible assets as of December 31.

In June 2001, the FASB issued SFAS 143, “Accounting for Asset Retirement Obligations.” This new standard, effective in 2003 requires entities to recognize the fair value of an asset retirement obligation in the period that it is incurred if a reasonable estimate of fair value can be made. The provisions of SFAS 143 are effective for fiscal years beginning after June 15, 2002. The adoption of SFAS 143 will have no material impact on our financial statements.

In July 2002, the FASB issued SFAS 146, “Accounting for Costs Associated with Exit or Disposal Activities,” which nullifies Emerging Issues Task Force Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” The provisions of SFAS 146 are effective for exit or disposal activities initiated after December 31, 2002. Previously issued financial statements cannot be restated under SFAS 146.

Results of Operations

Three Months Ended September 30, 2002 Compared to Three Months Ended September 30, 2001.

The following table sets forth, for the three months ended September 30, 2002 and 2001, selected operating results as a

percentage of restaurant sales:

	2002		2001
Restaurant sales:
Burger King	57.4	%	58.5	%
Pollo Tropical	15.3		14.1
Taco Cabana	27.3		27.4
	100.0		100.0
Costs and expenses:
Cost of sales	27.9		29.7
Restaurant wages and related expenses	29.8		28.8
Other restaurant expenses including advertising	24.2		24.0
General and administrative	5.3		5.1
Depreciation and amortization	6.0		6.4
Income from restaurant operations	6.8	%	5.9	%

Restaurant Sales

Total restaurant sales for the third quarter decreased 1.7% to $167.2 million in 2002 from $170.1 million in 2001. Burger King restaurant sales in the third quarter decreased $3.4 million to $96.0 million in 2002 due primarily to a sales decrease of 3.6% at our comparable Burger King restaurants (those restaurants operating for the entirety of both periods). This decrease was due in part to decreased Burger King promotional activities in the third quarter of 2002 compared to 2001. Pollo Tropical restaurant sales increased $1.5 million, or 6.4%, to $25.6 million in the third quarter of 2002 due to the opening of seven additional restaurants since the end of the third quarter of 2001. Sales at our comparable Pollo Tropical restaurants in the third quarter of 2002, however, decreased 3.8% due to the economic effects of declining tourism in our

21

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

RESULTS OF OPERATIONS AND FINANCIAL CONDITION—(Continued)

Orlando and South Florida markets. Taco Cabana restaurant sales in the third quarter decreased $1.0 million to $45.7 million in 2002 from $46.7 million in 2001. This decrease was due to a slight sales decrease of 0.3% at our comparable Taco Cabana restaurants in the third quarter of 2002 and the closure of seven restaurants in the Phoenix, Arizona market, primarily in the first quarter of 2002.

Operating Costs and Expenses

Cost of sales (food and paper costs), as a percentage of total restaurant sales, decreased to 27.9% in the third quarter of 2002 from 29.7% in 2001. Burger King cost of sales, as a percentage of Burger King restaurant sales, decreased to 26.4% in the third quarter of 2002 from 29.1% in 2001. This decrease was due to significantly lower promotional sales discounts in the third quarter of 2002 compared to 2001, and to a lesser extent, the effects of menu price increases in the fourth quarter of 2001, the slight reduction in size of the Burger King regular hamburger patty and a 7.8% decrease in beef commodity prices in the third quarter of 2002. Pollo Tropical cost of sales, as a percentage of Pollo Tropical restaurant sales, decreased to 30.7% in the third quarter of 2002 from 32.4% in 2001 due to lower chicken breast costs in 2002 and menu price increases at the beginning of 2002. Taco Cabana cost of sales, as a percentage of Taco Cabana restaurant sales, decreased to 29.3% in the third quarter of 2002 from 29.6% in 2001 due to lower cheese costs and slightly lower promotional sales discounts in the third quarter of 2002, partially offset by higher contracted beef costs in 2002.

Restaurant wages and related expenses, as a percentage of total restaurant sales, increased to 29.8% in the third quarter of 2002 from 28.8% in 2001. Burger King restaurant wages and related expenses, as a percentage of Burger King restaurant sales, increased to 31.3% in the third quarter of 2002 from 29.9% in 2001 due to the effects of lower Burger King sales volumes in the third quarter of 2002 on fixed labor costs. Pollo Tropical restaurant wages and related expenses, as a percentage of Pollo Tropical restaurant sales, increased to 26.8% in the third quarter of 2002 from 24.8% in 2001 due to the effect of lower sales volumes in the third quarter of 2002 on fixed labor costs and, to a lesser extent, higher workers compensation and medical insurance costs in the third quarter of 2002, offset partially by menu price increases at the beginning of 2002. Taco Cabana restaurant wages and related expenses, as a percentage of Taco Cabana restaurant sales, decreased slightly to 28.4% in the third quarter of 2002 from 28.5% in 2001 due to closing seven low sales volume restaurants in the Phoenix, Arizona market, primarily in the first quarter of 2002.

Other restaurant operating expenses (which includes advertising) as a percentage of total restaurant sales, increased to 24.2% in the third quarter of 2002 from 24.0% in 2001. Burger King other restaurant operating expenses, as a percentage of Burger King restaurant sales, increased to 25.7% in the third quarter of 2002 from 25.0% in 2001 due to the effect of lower sales volumes on fixed costs and higher utility costs, due to hot weather in the third quarter of 2002 in our Burger King markets. Pollo Tropical other restaurant operating expenses, as a percentage of Pollo Tropical restaurant sales, increased to 19.9% in the third quarter of 2002 from 18.5% in 2001 due to the effect of lower comparable restaurant sales volumes on fixed costs, the timing of advertising expenses in 2002 and higher maintenance expenses related to enhancing our restaurants. Taco Cabana other restaurant operating expenses, as a percentage of Taco Cabana restaurant sales, decreased to 23.5% in the third quarter of 2002 from 24.7% in 2001 due primarily to lower advertising costs in 2002 related to the timing of promotions and lower utility costs.

General and administrative expenses, as a percentage of total restaurant sales, increased to 5.3% in the third quarter of 2002 from 5.1% in 2001 due, in part, to the effect of lower Burger King sales volumes in the third quarter of 2002.

Earnings before interest, taxes and depreciation and amortization (“EBITDA”) increased to $21.8 million in the third quarter of 2002 from $21.4 million in 2001. As a percentage of total revenues, EBITDA margins increased to 13.0% in the third quarter of 2002 from 12.5% in 2001 as a result of the factors discussed above.

22

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

RESULTS OF OPERATIONS AND FINANCIAL CONDITION—(Continued)

Depreciation and amortization decreased $1.0 million in the third quarter of 2002 from the third quarter of 2001 due to the elimination of goodwill amortization under SFAS 142 beginning January 1, 2002. Goodwill amortization was $1.2 million in the third quarter of 2001. This decrease was offset by additional depreciation from our capital expenditures of $53.1 million since the end of the third quarter of 2001.

Interest expense decreased $1.2 million to $6.8 million in the third quarter of 2002 from $8.0 million in 2001 due primarily to lower effective interest rates on our debt, and, to a lesser extent, lower average debt balances in the third quarter of 2002. The average effective interest rate on all debt was 7.3% for the third quarter of 2002 compared to 8.3% in the third quarter of 2001.

The provision for income taxes for the third quarter of 2002 was derived using an estimated effective income tax rate for 2002 of 37.6%. This rate is higher than the Federal statutory tax rate of 35% due to state franchise taxes and non-deductible amortization of certain franchise rights. This rate is lower than our effective income tax rate for 2001 due to the elimination of the amortization of non-deductible goodwill under SFAS 142 effective January 1, 2002.

As a result of the foregoing, net income for the third quarter of 2002 increased to $3.2 million from $0.4 million in the third quarter of 2001.

Nine Months Ended September 30, 2002 Compared to Nine Months Ended September 30, 2001.

The following table sets forth, for the nine months ended September 30, 2002 and 2001, selected operating results as a percentage of restaurant sales:

	2002		2001
Restaurant sales:
Burger King	58.0	%	57.7	%
Pollo Tropical	15.2		14.9
Taco Cabana	26.8		27.4
	100.0		100.0
Costs and expenses:
Cost of sales	27.9		29.3
Restaurant wages and related expenses	29.7		29.2
Other restaurant expenses including advertising	23.8		23.9
General and administrative	5.7		5.4
Depreciation and amortization	6.0		6.5
Income from restaurant operations	6.9	%	5.7	%

Restaurant Sales

Total restaurant sales for the first nine months of 2002 increased $6.2 million to $497.7 million from $491.5 million in 2001. Burger King restaurant sales increased $5.2 million, or 1.8%, to $288.8 million in the first nine months of 2002 from $283.6 million in 2001. This increase was due to a sales increase at our comparable Burger King restaurants of 0.3% for the first nine months of 2002 and an increase of four average Burger King restaurants open in 2002. Pollo Tropical restaurant sales increased $2.2 million, or 3.0%, to $75.4 million in the first nine months 2002 due to the opening of seven additional restaurants since the end of the third quarter of 2001. Sales at our comparable Pollo Tropical restaurants in the first nine months of 2002, however, declined 5.0% due to the economic effects of declining tourism in our Florida markets since the September 11 tragedy. Taco Cabana restaurant sales decreased to $133.4 million in the first nine months of 2002 from $134.7 million in 2001. A sales increase at our comparable Taco Cabana restaurants of 1.2% in the first nine months of 2002 was offset by the closure of seven restaurants in the Phoenix, Arizona market, primarily in the first quarter of 2002.

23

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

RESULTS OF OPERATIONS AND FINANCIAL CONDITION—(Continued)

Operating Costs and Expenses

Cost of sales (food and paper costs), as a percentage of total restaurant sales, decreased to 27.9% in the first nine months of 2002 from 29.3% in 2001. Burger King cost of sales, as a percentage of Burger King restaurant sales, decreased to 26.5% in the first nine months of 2002 from 28.6% in 2001. This decrease was due to significantly lower promotional sales discounts in the first nine months of 2002 compared to 2001, and to a lesser extent, the effects of menu price increases in 2001 and the slight reduction in size of the Burger King regular hamburger patty in the fourth quarter of 2001. Pollo Tropical cost of sales, as a percentage of Pollo Tropical restaurant sales, decreased to 30.7% in the first nine months of 2002 from 32.4% in 2001 due to lower chicken breast costs in 2002 and the effect of menu price increases at the beginning of 2002. Taco Cabana cost of sales, as a percentage of Taco Cabana restaurant sales, increased to 29.4% in the first nine months of 2002 from 29.1% in 2001 due to higher contracted beef costs and slightly higher promotional sales discounts in 2002, none of which were offset by menu price increases in 2002.

Restaurant wages and related expenses, as a percentage of total restaurant sales, increased to 29.7% in the first nine months of 2002 from 29.2% in 2001. Burger King restaurant wages and related expenses, as a percentage of Burger King restaurant sales, increased to 31.2% in the first nine months of 2002 from 30.8% in 2001 due to higher state unemployment tax rates and higher restaurant level incentives in 2002, offset in part by menu price increases in 2001. Pollo Tropical restaurant wages and related expenses, as a percentage of Pollo Tropical restaurant sales, increased to 25.7% in the first nine months of 2002 from 24.0% in 2001 due to the effect of lower sales volumes on fixed labor costs and higher workers compensation and medical insurance costs. Taco Cabana restaurant wages and related expenses, as a percentage of Taco Cabana restaurant sales, increased slightly to 28.7% in the first nine months of 2002 from 28.6% in 2001 due primarily to labor rate increases.

Other restaurant operating expenses (which includes advertising) as a percentage of total restaurant sales, decreased slightly to 23.8% in the first nine months of 2002 from 23.9% in 2001. Burger King other restaurant operating expenses, as a percentage of Burger King restaurant sales, decreased slightly to 25.4% in the first nine months of 2002 from 25.5% in 2001 due to lower utility costs partially offset by an increase in local advertising expenditures. Pollo Tropical other restaurant operating expenses, as a percentage of Pollo Tropical restaurant sales, increased to 19.6% in the first nine months of 2002 from 18.6% in 2001. This increase was due to the effect of lower comparable restaurant sales volumes in 2002 on fixed costs, higher maintenance expenses related to enhancing our restaurants in 2002 and an insurance gain of $0.4 million in 2001, partially offset by lower utility costs in 2002. Taco Cabana other restaurant operating expenses, as a percentage of Taco Cabana restaurant sales, decreased to 22.7% in the first nine months of 2002 from 23.3% in 2001 due primarily to lower utility costs in 2002 and lower advertising costs due to the timing of promotions.

General and administrative expenses, increased $1.8 million in the first nine months of 2002 compared to 2001 due primarily to higher administrative bonus levels in 2002. As a percentage of total restaurant sales, general and administrative expenses increased to 5.7% in the first nine months of 2002 from 5.5% in 2001.

Earnings before interest, taxes and depreciation and amortization (“EBITDA”) increased 6.4% to $65.4 million in the first nine months of 2002 from $61.5 million in 2001. As a percentage of total revenues, EBITDA margins increased to 13.1% in the first nine months of 2002 compared to 12.5% in 2001 as a result of the factors discussed above.

Depreciation and amortization decreased $2.3 million in the first nine months of 2002 compared to 2001 due to the elimination of goodwill amortization under SFAS 142 beginning January 1, 2002. Goodwill amortization was $3.7 million in the first nine months of 2001. This decrease was partially offset by additional depreciation from our capital expenditures of $53.1 million since the end of the third quarter of 2001.

Interest expense decreased $4.8 million to $20.8 million in the first nine months of 2002 from $25.6 million in 2001 due primarily to lower effective interest rates on our debt, and, to a lesser extent, lower average debt balances in 2002. The average effective interest rate on all debt was 7.3% for the first nine months of 2002 compared to 8.8% in the first nine months of 2001.

24

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

RESULTS OF OPERATIONS AND FINANCIAL CONDITION—(Continued)

The provision for income taxes for the first nine months of 2002 was derived using an estimated effective income tax rate for 2002 of 37.6%. This rate is higher than the Federal statutory tax rate of 35% due to state franchise taxes and non-deductible amortization of certain franchise rights. This rate is lower than our effective income tax rate for 2001 due to the elimination of the amortization of non-deductible goodwill under SFAS 142 effective January 1, 2002.

As a result of the foregoing, net income increased $8.5 million to $9.2 million for the first nine months of 2002 from $0.7 million in 2001.

Liquidity and Capital Resources

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

• restaurant operations are primarily conducted on a cash basis;

• rapid turnover results in a limited investment in inventories; and

• cash from sales is usually received before related accounts for food, supplies and payroll become due.

Our cash requirements arise primarily from:

• the need to finance the opening and equipping of new restaurants;

• ongoing capital reinvestment in our existing restaurants;

• the acquisition of restaurants; and

• servicing our debt.

Our operations in the first nine months of 2002 generated approximately $46.3 million in cash, compared with $33.4 million in the first nine months of 2001.

In the first nine months of 2002 we sold five fee owned properties for $5.1 million in sale/leaseback transactions and used the proceeds from these sales to reduce debt.

Our capital expenditures are a major investment of cash, and excluding acquisitions, totaled $39.0 million and $33.5 million in the first nine months of 2002 and 2001, respectively. Expenditures for new restaurant development were $19.2 million and $13.8 million in the first nine months of 2002 and 2001, respectively. Our capital expenditures also include remodeling costs and capital maintenance projects for the ongoing reinvestment and enhancement of our restaurants and totaled $18.7 million and $18.0 million in the first nine months of 2002 and 2001, respectively.

In 2002, we anticipate total capital expenditures of approximately $55 million to $60 million, including approximately $26 million to $28 million for the construction of new restaurants and related real estate applicable to our three restaurant concepts as follows: $8 million to $9 million for Burger King, $11 million to $12 million for Taco Cabana and $7 million for Pollo Tropical. Also included in anticipated 2002 capital expenditures is approximately $11 million to $12 million for remodeling existing Burger King restaurants and approximately $3 million to $4 million for expenditures related to Burger King transformation initiatives, which include new signage and drive-thru and kitchen improvements. Other anticipated 2002 capital expenditures for ongoing reinvestment in our restaurants total approximately $12 million to $13 million; with approximately $4 million applicable to our Burger King restaurants, $2 million to $3 million for Pollo Tropical and $6 million for Taco Cabana, which includes $3.5 million to $4 million for the remodeling of our Taco Cabana restaurants in Austin, Texas including the installation of additional grills related to the introduction of grilled chicken.

At September 30, 2002, we had total indebtedness of $361.6 million comprised of $170.0 million of unsecured 9.5% Senior Subordinated Notes due 2008, total borrowings under our senior credit facility of $187.6 million and other debt of $4.0 million. Our senior credit facility provides for a $70 million term loan A facility, an $80 million term loan B facility and a $100 million

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

RESULTS OF OPERATIONS AND FINANCIAL CONDITION—(Continued)

revolving credit facility. At September 30, 2002, $136.6 was outstanding under the term loan A and B facilities and $41.8 million was available for borrowings under our revolving credit facility, after reserving $7.2 million for letters of credit guaranteed by the facility.

Interest payments under our senior subordinated notes and other existing debt obligations represent significant liquidity requirements for us. We believe cash generated from our operations and availability under our revolving credit facility will provide sufficient cash availability to cover our working capital needs, capital expenditures, planned development and debt service requirements for the next twelve months.

Inflation

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

ITEM 3—QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

There were no material changes from the information presented in Item 7A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2001 with respect to the Company’s market risk sensitive instruments.

ITEM 4—CONTROLS AND PROCEDURES

As required by Rule 13a-15 under the Exchange Act, within the 90 days prior to the filing date of this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective. There were no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls, nor any significant deficiencies or material weaknesses in such controls requiring corrective actions, subsequent to the date of their evaluation.

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PART II—OTHER INFORMATION

Item 1.    Legal Proceedings

There were no material legal proceedings commenced by or initiated against the Company during the reported quarter or material developments in any previously reported litigation.

Item 2.    Changes in Securities and Use of Proceeds

None

Item 3.    Default Upon Senior Securities

None

Item 4.    Submission of Matters to a Vote of Security Holders

None

Item 5.    Other Information

None

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Item 6.    Exhibits and Reports on Form 8K

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

Exhibit No.
10.29	Carrols Corporation Retirement Savings Plan dated July 1, 2002.
10.30	Addendum incorporating EGTRRA Compliance Amendment to Carrols Corporation Retirement Savings Plan dated September 12, 2002.
99.1	Certificate Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 dated November 13, 2002 by Alan Vituli.
99.2	Certificate Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 dated November 13, 2002 by Paul R. Flanders.

b. There were no reports on Form 8-K filed during the reported quarter.

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SIGNATURE

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

CARROLS CORPORATION

968 James Street

Syracuse, New York 13203

(Registrant)

Date:  November 13, 2002	/S/    ALAN VITULI (Signature)
	Alan Vituli Chairman and Chief Executive Officer

Date:  November 13, 2002	/S/    PAUL R. FLANDERS (Signature)
	Paul R. Flanders Vice President—Finance (Chief Financial Officer)

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CERTIFICATIONS

I, Alan Vituli, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Carrols Corporation;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date:  November 13, 2002	/S/    ALAN VITULI
	Alan Vituli Chairman and Chief Executive Officer

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CERTIFICATIONS

I, Paul R. Flanders, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Carrols Corporation;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date:  November 13, 2002	/S/    PAUL R. FLANDERS
	Paul R. Flanders Vice President—Finance (Chief Financial Officer)

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