Carrols 10-Q 2004 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 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, 2003

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.    Yes  x    No  ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The number of shares of the registrant’s common stock outstanding as of November 10, 2003:10 shares

PART I

ITEM 1 - FINANCIAL STATEMENTS

CARROLS CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands of dollars)

	September 30, 2003		December 31, 2002
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	3,250	$	2,538
Trade and other receivables, net of reserves of $128 at each date		1,560		1,306
Inventories		4,978		5,240
Prepaid rent		2,403		2,227
Prepaid expenses and other current assets		5,194		4,382
Refundable income taxes		193		1,253
Deferred income taxes		9,564		9,454
Total current assets		27,142		26,400
Property and equipment, at cost less accumulated depreciation of $160,906 and $146,782, respectively		193,651		223,790
Franchise rights, at cost less accumulated amortization of $49,608 and $47,109, respectively		87,239		90,620
Intangible assets, at cost less accumulated amortization of $10,099 and $10,061, respectively (Note 3)		122,340		122,378
Other assets		8,024		10,389
Total assets	$	438,396	$	473,577

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, 2003		December 31, 2002
	(unaudited)
LIABILITIES and STOCKHOLDER’S EQUITY
Current liabilities:
Accounts payable	$	13,048	$	16,099
Accrued interest		6,009		1,415
Accrued payroll, related taxes and benefits		12,473		15,130
Other liabilities		16,170		14,415
Current portion of long-term debt		16,249		12,299
Total current liabilities		63,949		59,358
Long-term debt, net of current portion		301,410		348,615
Deferred income – sale/leaseback of real estate		10,663		5,887
Accrued postretirement benefits		2,830		2,585
Deferred income taxes		2,543		901
Other liabilities (Note 5)		27,369		29,572
Total liabilities		408,764		446,918
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 earnings		5,147		2,174
Total stockholder’s equity		29,632		26,659
Total liabilities and stockholder’s equity	$	438,396	$	473,577

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, 2003 AND 2002

(in thousands of dollars)

(unaudited)

	2003		2002
Revenues:
Restaurant sales	$	165,836	$	167,196
Franchise royalty revenues and fees		359		384
Total revenues		166,195		167,580
Costs and expenses:
Cost of sales		47,304		46,571
Restaurant wages and related expenses		49,400		50,119
Other restaurant operating expenses		33,276		32,252
Advertising expense		6,261		7,915
General and administrative		10,236		8,921
Depreciation and amortization		11,298		9,980
Total operating expenses		157,775		155,758
Income from operations		8,420		11,822
Interest expense		6,257		6,839
Income before income taxes		2,163		4,983
Provision for income taxes		976		1,793
Net income	$	1,187	$	3,190

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, 2003 AND 2002

(in thousands of dollars)

(unaudited)

	2003		2002
Revenues:
Restaurant sales	$	483,001	$	497,658
Franchise royalty revenues and fees		1,055		1,102
Total revenues		484,056		498,760
Costs and expenses:
Cost of sales		135,123		138,829
Restaurant wages and related expenses		146,224		148,351
Other restaurant operating expenses		96,945		96,025
Advertising expense		21,266		21,968
General and administrative		28,448		28,204
Depreciation and amortization		31,531		29,776
Total operating expenses		459,537		463,153
Income from operations		24,519		35,607
Interest expense		19,249		20,822
Income before income taxes		5,270		14,785
Provision for income taxes (Note 4)		2,297		5,554
Net income	$	2,973	$	9,231

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, 2003 AND 2002

(in thousands of dollars)

(unaudited)

	2003			2002
Cash flows provided from operating activities:
Net income	$	2,973		$	9,231
Adjustments to reconcile net income to net cash provided from operating activities:
Loss on disposal of property and equipment		388			35
Depreciation and amortization		31,531			29,776
Deferred income taxes		1,532			4,540
Change in operating assets and liabilities		(1,204	)		2,693
Net cash provided from operating activities		35,220			46,275
Cash flows used for investing activities:
Capital expenditures:
New restaurant development		(16,833	)		(19,219	)
Restaurant remodeling		(3,133	)		(11,198	)
Other restaurant expenditures		(5,468	)		(7,456	)
Corporate and restaurant information systems		(1,187	)		(1,124	)
Total capital expenditures		(26,621	)		(38,997	)
Properties purchased for sale-leaseback		(3,149	)		(925	)
Proceeds from sales of non-operating properties		2,670			—
Net cash used for investing activities		(27,100	)		(39,922	)
Cash flows used for financing activities:
Payments on revolving credit facility, net		(36,100	)		(4,500	)
Principal payments on term loans		(5,500	)		(6,375	)
Payments on other notes payable, net		(716	)		(726	)
Principal payments on capital leases		(370	)		(427	)
Proceeds from sale-leaseback transactions		35,278			5,066
Net cash used for financing activities		(7,408	)		(6,962	)
Increase in cash and cash equivalents		712			(609	)
Cash and cash equivalents, beginning of period		2,538			2,405
Cash and cash equivalents, end of period	$	3,250		$	1,796

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

6

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands of dollars)

1.Statement of Management

The accompanying unaudited consolidated financial statements as of September 30, 2003 and for the three and nine months ended September 30, 2003 and 2002 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, 2003 and 2002 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 majority owned subsidiaries (“Carrols” or the “Company”). All material inter-company 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, 2002 contained in our 2002 Annual Report on Form 10-K. The December 31, 2002 balance sheet data is derived from these audited financial statements.

2.Impairment of Long-Lived Assets

The Company reviews its long-lived assets for impairment at the restaurant level on an ongoing basis. If an indicator of impairment exists for any of its restaurants, an estimate of undiscounted future cash flows produced by each restaurant is compared to that restaurant’s carrying value. If an asset is determined to be impaired, an impairment charge is measured by the excess of the carrying amount of the asset over its fair value. For the three-month and nine-month periods ended September 30, 2003 the Company has recorded impairment charges, included in depreciation and amortization, of $37 and $668, respectively, related to its property and equipment for certain of its Burger King restaurants and $1,650 and $1,869, respectively, related to its property and equipment for certain of its Taco Cabana restaurants.

7

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands of dollars)

3.Intangible Assets

Intangible assets, net of accumulated amortization, consisted of the following:

	September 30, 2003		December 31, 2002
Goodwill, net of accumulated amortization of $9,902 at both dates	$	121,345	$	121,345
Trademarks, net of accumulated amortization of $36 at both dates		228		228
Other, net of accumulated amortization of $161 and $123, respectively		767		805
	$	122,340	$	122,378

Intangible assets, net of accumulated amortization, applicable to our business segments consisted of the following:

	September 30, 2003		December 31, 2002
Burger King	$	1,485	$	1,523
Pollo Tropical		57,382		57,383
Taco Cabana		63,473		63,472
	$	122,340	$	122,378

4.Income Taxes

The income tax provision for the nine months ended September 30, 2003 and 2002 was comprised of the following:

	2003		2002
Current	$	765	$	1,014
Deferred		1,532		4,540
	$	2,297	$	5,554

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.

8

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands of dollars)

5.Other Liabilities

Other long-term liabilities at September 30, 2003 and December 31, 2002 consisted of the following:

	September 30, 2003		December 31, 2002
Unearned purchase discounts	$	11,465	$	13,330
Accrued occupancy costs		7,869		8,373
Other		8,035		7,869
	$	27,369	$	29,572

6.Stock-Based Compensation Disclosures Required by SFAS No. 148

Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation,” “SFAS 123” permits entities to recognize as an expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS 123 allows entities to continue to apply the provisions of Accounting Principles Bulletin No. 25 (“APB 25”) and provide pro forma net income disclosures for employee stock option grants as if the fair-value-based method defined in SFAS 123 has been applied. The Company has elected to continue applying the provisions of APB 25 and provide the pro forma disclosure provisions of SFAS 123. Had compensation cost been determined based upon the fair value of the stock options at grant date consistent with the method of SFAS 123, the Company’s pro-forma net income would have been $2,765 and $8,158 for the nine months ended September 30, 2003 and 2002, respectively.

7.Business Segment Information

The Company is engaged in the 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-casual restaurant chain featuring grilled marinated chicken and authentic “made from scratch” side dishes. Pollo Tropical’s core markets are located in south and central Florida. Taco Cabana is a regional quick-casual restaurant chain featuring Mexican style food, including flame-grilled beef and chicken fajitas, quesadillas and other Mexican dishes. Taco Cabana’s core markets are primarily in Texas.

The “Other” column includes corporate related items not allocated to reportable segments, and for income from operations, principally corporate depreciation and amortization. Other assets consist primarily of franchise rights and intangible assets.

9

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(in thousands of dollars)

	Burger King		Pollo Tropical		Taco Cabana		Other			Consolidated
Three Months Ended:
September 30, 2003:
Revenues	$	91,153	$	27,870	$	47,172	$	—		$	166,195
Cost of sales		24,756		8,381		14,167		—			47,304
Restaurant wages and related expenses		28,918		7,070		13,412		—			49,400
Depreciation and amortization		6,127		720		3,404		1,047			11,298
Income (loss) from operations		3,078		4,099		2,290		(1,047	)		8,420
Capital expenditures, excluding acquisitions		1,345		441		5,107		211			7,104
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		13,176		—			50,119
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
Nine Months Ended:
September 30, 2003:
Revenues	$	266,878	$	81,644	$	135,534	$	—		$	484,056
Cost of sales		70,406		24,786		39,931		—			135,123
Restaurant wages and related expenses		86,167		21,086		38,971		—			146,224
Depreciation and amortization		18,387		2,737		7,269		3,138			31,531
Income (loss) from operations		6,736		11,756		9,165		(3,138	)		24,519
Capital expenditures, excluding acquisitions		6,519		4,160		14,755		1,187			26,621
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		38,964		—			148,351
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
Total Assets :
At September 30, 2003	$	193,637	$	27,544	$	61,311	$	155,904		$	438,396
At December 31, 2002	$	213,094	$	33,117	$	68,880	$	158,486		$	473,577

10

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(in thousands of dollars)

8.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 of 2001, comprised of $7.1 million in asset impairments, primarily leasehold improvements, $1.0 million in future occupancy costs and $0.7 million in other exit costs 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. Through September 30, 2003, the Company has incurred $0.4 million in net lease costs for the closed restaurants and $0.4 million in net other exit costs. At September 30, 2003, the Company had $0.6 million in lease liability reserves and $0.3 million in other exit cost reserves related to these restaurants.

9.Recent Accounting Pronouncements

In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation of Variable Interest Entities (“FIN 46”). The objective of this interpretation is to provide guidance on how to identify a variable interest entity (VIE) and determine when the assets, liabilities, non-controlling interests and results of operations of a VIE need to be included in a company’s consolidated financial statements. A company that holds variable interests in an entity will need to consolidate the entity if the company’s interest in the VIE is such that the company will absorb a majority of the VIE’s expected losses and/or receive a majority of the entity’s expected residual returns, if they occur. FIN 46 also requires additional disclosures by primary beneficiaries and other significant variable interest holders. As amended by FASB Staff Position No. FIN 46-6, FIN 46 is effective for the Company beginning in the first quarter of 2004. The Company is completing its assessment of this interpretation on the Company’s financial statements. The Company does not believe that this interpretation will have a material impact on its financial statements, if any.

11

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(in thousands of dollars)

10.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 condensed consolidating basis, consolidating 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, 2003 and December 31, 2002 and for the three-month and nine-month periods ended September 30, 2003 and 2002. Debt and goodwill allocated to subsidiaries are presented on an accounting “push-down” basis.

During the quarter ended June 30, 2003, the Parent Company entered into an intercompany agreement, retroactive to January 1, 2002, to charge interest to the Guarantor Subsidiaries. The retroactive interest recorded in the second quarter of 2003 was $14,097.

12

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

CONSOLIDATING BALANCE SHEET

September 30, 2003

(in thousands of dollars)

(unaudited)

	Parent Company Only		Guarantor Subsidiaries			Combined Total
ASSETS
Current Assets:
Cash and cash equivalents	$	931	$	2,319		$	3,250
Trade and other receivables, net		402		1,158			1,560
Inventories		3,348		1,630			4,978
Prepaid rent		1,306		1,097			2,403
Prepaid expenses and other current assets		2,055		3,139			5,194
Refundable income taxes		193		—			193
Deferred income taxes		9,564		—			9,564
Total current assets		17,799		9,343			27,142
Property and equipment, net		103,561		90,090			193,651
Franchise rights, net		87,239		—			87,239
Intangible assets, net		1,485		120,855			122,340
Intercompany receivable (payable)		160,488		(160,488	)		—
Other assets		5,954		2,070			8,024
Total assets	$	376,526	$	61,870		$	438,396
LIABILITIES AND STOCKHOLDER’S EQUITY
Current Liabilities:
Accounts payable	$	7,109	$	5,939		$	13,048
Accrued interest		6,009		—			6,009
Accrued payroll, related taxes and benefits		7,312		5,161			12,473
Other liabilities		7,691		8,479			16,170
Current portion of long-term debt		16,008		241			16,249
Total current liabilities		44,129		19,820			63,949
Long-term debt, net of current portion		300,695		715			301,410
Deferred income, sale/leaseback of real estate		5,994		4,669			10,663
Accrued postretirement benefits		2,830		—			2,830
Deferred income taxes		2,543		—			2,543
Other liabilities		15,639		11,730			27,369
Total liabilities		371,830		36,934			408,764
Stockholder’s equity		4,696		24,936			29,632
Total liabilities and stockholder’s equity	$	376,526	$	61,870		$	438,396

13

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

CONSOLIDATING BALANCE SHEET

December 31, 2002

(in thousands of dollars)

	Parent Company Only			Guarantor Subsidiaries			Combined Total
ASSETS
Current Assets:
Cash and cash equivalents	$	715		$	1,823		$	2,538
Trade and other receivables, net		351			955			1,306
Inventories		3,761			1,479			5,240
Prepaid rent		1,229			998			2,227
Prepaid expenses and other current assets		1,539			2,843			4,382
Refundable income taxes		1,253			—			1,253
Deferred income taxes		9,454			—			9,454
Total current assets		18,302			8,098			26,400
Property and equipment, net		119,522			104,268			223,790
Franchise rights, net		90,620			—			90,620
Intangible assets, net		1,523			120,855			122,378
Intercompany receivable (payable)		174,863			(174,863	)		—
Other assets		7,832			2,557			10,389
Total assets	$	412,662		$	60,915		$	473,577
LIABILITIES AND STOCKHOLDER’S EQUITY
Current Liabilities:
Accounts payable	$	10,344		$	5,755		$	16,099
Accrued interest		1,415			—			1,415
Accrued payroll, related taxes and benefits		10,036			5,094			15,130
Other liabilities		6,498			7,917			14,415
Current portion of long-term debt		12,006			293			12,299
Total current liabilities		40,299			19,059			59,358
Long-term debt, net of current portion		347,720			895			348,615
Deferred income, sale/leaseback of real estate		4,755			1,132			5,887
Accrued postretirement benefits		2,585			—			2,585
Deferred income taxes		901			—			901
Other liabilities		16,486			13,086			29,572
Total liabilities		412,746			34,172			446,918
Stockholder’s equity		(84	)		26,743			26,659
Total liabilities and stockholder’s equity	$	412,662		$	60,915		$	473,577

14

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

CONSOLIDATING STATEMENT OF OPERATIONS

Three Months Ended September 30, 2003

(in thousands of dollars)

(unaudited)

	Parent Company Only			Guarantor Subsidiaries		Combined Total
Revenues:
Restaurant sales	$	91,153		$	74,683	$	165,836
Franchise royalty revenues and fees		—			359		359
Total revenues		91,153			75,042		166,195
Costs and expenses:
Cost of sales		24,756			22,548		47,304
Restaurant wages and related expenses		28,918			20,482		49,400
Other restaurant operating expenses		19,464			13,812		33,276
Advertising expense		3,580			2,681		6,261
General and administrative		5,230			5,006		10,236
Depreciation and amortization		6,966			4,332		11,298
Total operating expenses		88,914			68,861		157,775
Income from operations		2,239			6,181		8,420
Interest expense		6,211			46		6,257
Intercompany allocations		(2,819	)		2,819		—
Income (loss) before income taxes		(1,153	)		3,316		2,163
Provision for income taxes		375			601		976
Net income (loss)	$	(1,528	)	$	2,715	$	1,187

15

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 royalty revenues and fees		—			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			20,056		50,119
Other restaurant operating expenses		20,247			12,005		32,252
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

16

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

CONSOLIDATING STATEMENT OF OPERATIONS

Nine Months Ended September 30, 2003

(in thousands of dollars)

(unaudited)

	Parent Company Only			Guarantor Subsidiaries			Combined Total
Revenues:
Restaurant sales	$	266,878		$	216,123		$	483,001
Franchise royalty revenues and fees		—			1,055			1,055
Total revenues		266,878			217,178			484,056
Costs and expenses:
Cost of sales		70,406			64,717			135,123
Restaurant wages and related expenses		86,167			60,057			146,224
Other restaurant operating expenses		57,877			39,068			96,945
Advertising expense		11,592			9,674			21,266
General and administrative		15,713			12,735			28,448
Depreciation and amortization		20,892			10,639			31,531
Total operating expenses		262,647			196,890			459,537
Income from operations		4,231			20,288			24,519
Interest expense		19,070			179			19,249
Intercompany allocations		(24,946	)		24,946			—
Income (loss) before income taxes		10,107			(4,837	)		5,270
Provision (benefit) for income taxes		3,563			(1,266	)		2,297
Net income (loss)	$	6,544		$	(3,571	)	$	2,973

17

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 royalty revenues and fees		—			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			58,364		148,351
Other restaurant operating expenses		60,902			35,123		96,025
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

18

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

CONSOLIDATING STATEMENT OF CASH FLOWS

Nine Months Ended September 30, 2003

(in thousands of dollars)

(unaudited)

	Parent Company Only			Guarantor Subsidiaries			Combined Total
Cash flows provided from (used for) operating activities:
Net income (loss)	$	6,544		$	(3,571	)	$	2,973
Adjustments to reconcile net income (loss) to net cash provided from operating activities:
Loss on disposal of property and equipment		—			388			388
Depreciation and amortization		20,892			10,639			31,531
Deferred income taxes		1,532			—			1,532
Changes in operating assets and liabilities		11,521			(12,725	)		(1,204	)
Net cash provided from (used for) operating activities		40,489			(5,269	)		35,220
Cash flow used for investing activities:
Capital expenditures:
New restaurant development		(1,901	)		(14,932	)		(16,833	)
Restaurant remodeling		(2,986	)		(147	)		(3,133	)
Other restaurant expenditures		(1,632	)		(3,836	)		(5,468	)
Corporate and restaurant information systems		(931	)		(256	)		(1,187	)
Total capital expenditures		(7,450	)		(19,171	)		(26,621	)
Purchased properties for sale/leaseback		—			(3,149	)		(3,149	)
Proceeds from sales of non-operating properties		—			2,670			2,670
Net cash used for investing activities		(7,450	)		(19,650	)		(27,100	)
Cash flows provided from (used for) financing activities:
Proceeds from revolving credit facility, net		(36,100	)		—			(36,100	)
Principal payments on term loans		(5,500	)		—			(5,500	)
Payments on other notes payable, net		(716	)		—			(716	)
Principal payments on capital leases		(138	)		(232	)		(370	)
Proceeds from sale leaseback transactions		9,631			25,647			35,278
Net cash provided from (used for) financing activities		(32,823	)		25,415			(7,408	)
Net increase in cash and cash equivalents		216			496			712
Cash and cash equivalents, beginning of year		715			1,823			2,538
Cash and cash equivalents, end of period	$	931		$	2,319		$	3,250

19

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		4,211			(1,518	)		2,693
Net cash provided from operating activities		26,543			19,732			46,275
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	)
Other restaurant expenditures		(4,076	)		(3,380	)		(7,456	)
Corporate and restaurant information systems		(530	)		(594	)		(1,124	)
Total capital expenditures		(18,412	)		(20,585	)		(38,997	)
Purchased properties for sale/leaseback		(925	)		—			(925	)
Net cash used for investing activities		(19,337	)		(20,585	)		(39,922	)
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

20

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

Certain statements included in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” 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 in implementing its current business and operational strategies; availability, terms and access to capital and customary trade credit; availability of restaurant supplies and distribution of product; 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; and labor and employee benefit costs. The Company undertakes no obligation to publicly update any forward-looking statements for any reason, even if new information becomes available or other events occur in the future.

Overview

We are one of the largest restaurant companies in the U. S. operating 532 restaurants in 16 states at September 30, 2003. We are the largest Burger King franchisee in the world, 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. At September 30, 2003, we operated 351 Burger King restaurants located in 13 Northeastern, Midwestern and Southeastern states. Our Burger King restaurant sales were $266.9 million in the first nine months of 2003, or 55.3% of total restaurant sales.

We have expanded and diversified our operations during the past five years with the acquisition of two regional Hispanic restaurant chains. Our Hispanic restaurant brands, which include Taco Cabana and Pollo Tropical, collectively operate or franchise more than 200 restaurants. In 1998, we acquired Pollo Tropical Inc., a restaurant chain featuring grilled marinated chicken and authentic “made from scratch” side dishes, for a cash purchase price of approximately $95 million. Since the acquisition, we have expanded this concept by over 65% by opening 24 new Pollo Tropical restaurants. At September 30, 2003, we operated 60 company owned Pollo Tropical restaurants in Florida and franchised 24 Pollo Tropical restaurants, 19 of which are in Puerto Rico. Total Pollo Tropical sales from Company operated restaurants were $80.9 million in the first nine months of 2003.

21

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

In December 2000, we acquired Taco Cabana Inc., a restaurant chain featuring Mexican style food including flame-grilled beef and chicken fajitas, quesadillas, and fresh flour tortillas, for a total purchase price of approximately $155 million. At September 30, 2003, we operated 121 company owned Taco Cabana restaurants located in Texas and Oklahoma and franchised 10 Taco Cabana restaurants. Since the acquisition, we have opened eighteen new Taco Cabana restaurants and have closed fourteen restaurants, including seven restaurants in the Phoenix, Arizona market, of which six were closed in the first quarter of 2002. Total Taco Cabana sales from Company operated restaurants were $135.2 million in the first nine months of 2003.

We use a 52-53 week fiscal year ending on the Sunday closest to December 31. All references herein to the fiscal years ended December 30, 2001 and December 29, 2002 will be referred to as the fiscal years ended December 31, 2001 and 2002, respectively. Also, all references herein to the nine months ended September 29, 2002 and the nine months ended September 28, 2003 will be referred to as the nine months ended September 30, 2002 and 2003, respectively. The fiscal years ended December 31, 2003, 2002 and 2001 each contain 52 weeks.

Significant Accounting Policies

Financial Reporting Release No. 60 requires all companies to 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.

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 covered 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 accrued occupancy costs, insurance liabilities, legal obligations, income taxes and the valuation of intangible assets for impairment. While we apply our judgment based on 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 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.

22

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

We are self-insured for most workers’ compensation, general liability and medical insurance claims. We record insurance liabilities based on historical and industry trends, which are continually monitored, 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.

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 use outside legal advice 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 would include 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 intangible assets for impairment under Statement of Financial Accounting Standards No. (“SFAS”) 142, “Goodwill and Other Intangible Assets,” on an ongoing basis. We have elected to conduct our annual impairment review of intangible assets at December 31. Our review at December 31, 2002 indicated there has been no impairment as of that date. 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 June 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS 143, “Accounting for Asset Retirement Obligations.” This new standard, effective for 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 adoption of SFAS 143 has had 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.

23

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

We have adopted FASB Interpretation No. 45, “Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others”, an interpretation of FASB Statements No. 5, 57 and 107 and a rescission of FASB Interpretation No. 34 (“FIN 45”). FIN 45 elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees issued. FIN 45 also clarifies that a guarantor is required to recognize, at inception of a guarantee, a liability for the fair value of the obligation undertaken. The initial recognition and measurement provisions were applicable to guarantees issued or modified after December 31, 2002. The adoption of FIN 45 has had no material impact on our financial statements.

In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation of Variable Interest Entities (“FIN 46”). The objective of this interpretation is to provide guidance on how to identify a variable interest entity (VIE) and determine when the assets, liabilities, non-controlling interests and results of operations of a VIE need to be included in a company’s consolidated financial statements. A company that holds variable interests in an entity will need to consolidate the entity if the company’s interest in the VIE is such that the company will absorb a majority of the VIE’s expected losses and/or receive a majority of the entity’s expected residual returns, if they occur. FIN 46 also requires additional disclosures by primary beneficiaries and other significant variable interest holders. As amended by FASB Staff Position No. FIN 46-6, FIN 46 is effective for the Company beginning in the first quarter of 2004. The Company is completing its assessment of this interpretation on the Company’s financial statements. The Company does not believe that this interpretation will have a material impact on its financial statements, if any.

Results of Operations

Since September 30, 2002 we have opened five new Burger King restaurants, closed eleven Burger King restaurants, opened two new Pollo Tropical restaurants, opened ten Taco Cabana restaurants and closed three Taco Cabana restaurants.

Three Months Ended September 30, 2003 Compared to Three Months Ended September 30, 2002.

The following table sets forth, for the three months ended September 30, 2003 and 2002, selected operating results as a percentage of total restaurant sales:

	2003		2002
Restaurant sales:
Burger King	54.9	%	57.4	%
Pollo Tropical	16.7	%	15.3	%
Taco Cabana	28.4	%	27.3	%
	100.0	%	100.0	%
Costs and expenses:
Cost of sales	28.5	%	27.9	%
Restaurant wages and related expenses	29.8	%	30.0	%
Other restaurant expenses including advertising	23.8	%	24.0	%
General and administrative	6.2	%	5.3	%
Depreciation and amortization	6.8	%	6.0	%
Income from restaurant operations	4.9	%	6.8	%

24

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Restaurant Sales - Total restaurant sales for the third quarter of 2003 decreased $1.4 million to $165.8 million from $167.2 million in the third quarter of 2002. Burger King restaurant sales decreased $4.8 million, or 5.0%, to $91.2 million in the third quarter of 2003 due primarily to a sales decrease at our comparable Burger King restaurants of 6.4%. This decrease was due primarily to reduced customer traffic from promotions compared to the prior year. Sales at our comparable Burger King restaurants also decreased 3.6% in the third quarter of 2002. Pollo Tropical restaurant sales increased $2.0 million, or 8.1%, to $27.6 million in the third quarter of 2003 due to the opening of six additional restaurants since the beginning of the third quarter of 2002 and sales increases of 3.3% at our comparable Pollo Tropical restaurants in the third quarter of 2003. Taco Cabana restaurant sales increased 3.1% to $47.1 million in the third quarter of 2003 from $45.7 million in 2002 due to the opening of eleven new restaurants since the beginning of the third quarter of 2002 partially offset by a sales decrease at our comparable Taco Cabana restaurants of 4.8% in the third quarter of 2003.

Operating Costs and Expenses - Cost of sales (food and paper costs), as a percentage of total restaurant sales, increased to 28.5% in the third quarter of 2003 from 27.9% in 2002. Burger King cost of sales, as a percentage of Burger King restaurant sales, increased to 27.2% in the third quarter of 2003 from 26.4% in the third quarter of 2002 due to a 10% increase in beef commodity prices and lower rebates, partially offset by the effects of modest menu price increases in the fourth quarter of 2002. Pollo Tropical cost of sales, as a percentage of Pollo Tropical restaurant sales, decreased to 30.3% in the third quarter of 2003 from 30.7% in 2002 due primarily to lower chicken commodity prices in 2003. Taco Cabana cost of sales, as a percentage of Taco Cabana restaurant sales, increased to 30.1% in the third quarter of 2003 from 29.3% in 2002 due to lower gross margins on promotional menu items and higher cheese commodity prices.

Restaurant wages and related expenses, as a percentage of total restaurant sales, decreased to 29.8% in the third quarter of 2003 from 30.0% in 2002. Burger King restaurant wages and related expenses, as a percentage of Burger King restaurant sales, increased to 31.7% in the third quarter of 2003 from 31.3% in 2002 due to the effect of lower sales volumes on fixed labor costs and higher medical and workers compensation costs. These factors were partially offset by restaurant productive labor efficiencies. Pollo Tropical restaurant wages and related expenses, as a percentage of Pollo Tropical restaurant sales, decreased to 25.5% in the third quarter of 2003 from 26.8% in 2002 due to restaurant labor efficiencies, lower workers compensation costs and the effect of higher sales volumes on fixed labor costs. Taco Cabana restaurant wages and related expenses, as a percentage of Taco Cabana restaurant sales, decreased to 28.5% in the third quarter of 2003 from 28.9% in 2002 due to lower restaurant level bonuses and restaurant labor efficiencies partially offset by the effect of lower sales volumes on fixed labor costs.

25

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Other restaurant operating expenses (which includes advertising) as a percentage of total restaurant sales, decreased to 23.8% in the third quarter of 2003 from 24.0% in 2002. Burger King other restaurant operating expenses, as a percentage of Burger King restaurant sales, decreased to 25.4% in the third quarter of 2003 from 25.7% in 2002 due to lower local advertising expenditures and lower discretionary restaurant operating expenses, partially offset by the effect of lower sales volumes on fixed costs including occupancy. Pollo Tropical other restaurant operating expenses, as a percentage of Pollo Tropical restaurant sales, increased to 20.8% in the third quarter of 2003 from 19.9% in 2002 due to higher utility costs from increases in natural gas prices and higher occupancy costs due to the sale/leaseback of six Pollo Tropical properties in 2003. These were partially offset by lower advertising costs, due to the timing of promotions, and lower restaurant repair and maintenance expenses. Taco Cabana other restaurant operating expenses, as a percentage of Taco Cabana restaurant sales, decreased to 22.8% in the third quarter of 2003 from 23.0% in 2002 due to significantly lower advertising costs as a result of the timing of promotions compared to 2002. This was substantially offset by higher utility costs from increases in natural gas and electricity prices, higher occupancy costs due to the sale/leaseback of twelve Taco Cabana properties in 2003 and the effect of lower sales volumes on fixed costs.

General and administrative expenses increased $1.3 million in the third quarter of 2003, due primarily to non-recurring costs in the third quarter of 2003 which resulted from severance costs related to management changes at Pollo Tropical and the restructuring of an unfavorable Taco Cabana restaurant lease. In addition, the Company recorded a gain on a legal settlement in the third quarter of 2002. As a percentage of total restaurant sales, general and administrative expenses increased to 6.2% in the third quarter of 2003 from 5.3% in 2002.

EBITDA - Earnings before interest, taxes and depreciation and amortization (“EBITDA”) decreased to $19.7 million in the third quarter of 2003 from $21.8 million in the third quarter of 2002. As a percentage of total revenues, EBITDA margins decreased to 11.9% in the third quarter of 2003 from 13.0% in 2002 as a result of the factors discussed above. See Reconciliation of Non-GAAP Financial Measures on page 30.

Depreciation and Amortization - Depreciation and amortization increased $1.3 million in the third quarter of 2003 from 2002 due primarily to impairment charges of $1.7 million related to property and equipment for certain of our Taco Cabana restaurants.

Interest Expense - Interest expense decreased $0.6 million to $6.3 million in the third quarter of 2003 due primarily to lower average debt balances in the third quarter of 2003. The average effective interest rate on all debt was 7.2% for the third quarter of 2003 compared to 7.3% in the third quarter of 2002.

Income Taxes - The provision for income taxes for the third quarter of 2003 was derived using an estimated annual effective income tax rate for 2003 of 43.6%. 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.

Net Income- As a result of the foregoing, net income for the third quarter of 2003 decreased to $1.2 million from $3.2 million in the third quarter of 2002.

26

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Nine Months Ended September 30, 2003 Compared to Nine Months Ended September 30, 2002.

The following table sets forth, for the nine months ended September 30, 2003 and 2002, selected operating results as a percentage of total restaurant sales:

	2003		2002
Restaurant sales:
Burger King	55.3	%	58.0	%
Pollo Tropical	16.7	%	15.2	%
Taco Cabana	28.0	%	26.8	%
	100.0	%	100.0	%
Costs and expenses:
Cost of sales	28.0	%	27.9	%
Restaurant wages and related expenses	30.3	%	29.8	%
Other restaurant expenses including advertising	24.5	%	23.7	%
General and administrative	5.9	%	5.7	%
Depreciation and amortization	6.5	%	6.0	%
Income from restaurant operations	4.8	%	6.9	%

Restaurant Sales - Total restaurant sales for the first nine months of 2003 decreased 2.9% to $483.0 million from $497.7 million in 2002. Burger King restaurant sales decreased $21.9 million, or 7.6%, to $266.9 million in the first nine months of 2003 from $288.8 million in 2002 due to a sales decline at our comparable Burger King restaurants of 7.8% for the first nine months of 2003. Pollo Tropical restaurant sales increased $5.5 million, or 7.2%, to $80.9 million in the first nine months of 2003 due primarily to the opening of seven restaurants since the beginning of 2002. Sales at our comparable Pollo Tropical restaurants in the first nine months of 2003 increased 0.6%. Taco Cabana restaurant sales increased to $135.2 million in the first nine months of 2003 from $133.4 million in 2002 due to the opening of thirteen restaurants since the beginning of 2002 partially offset by a sales decrease at our comparable Taco Cabana restaurants of 4.8% in the first nine months of 2003.

27

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Operating Costs and Expenses - Cost of sales (food and paper costs), as a percentage of total restaurant sales, increased slightly to 28.0% in the first nine months of 2003 from 27.9% in 2002. Burger King cost of sales, as a percentage of Burger King restaurant sales, decreased slightly to 26.4% in the first nine months of 2003 from 26.5% in 2002 due to higher rebates, improvements in restaurant food cost controls and the effects of modest menu price increases in the fourth quarter of 2002, partially offset by higher promotional sales discounts in 2003. Pollo Tropical cost of sales, as a percentage of Pollo Tropical restaurant sales, decreased slightly to 30.6% in the first nine months of 2003 from 30.7% in 2002 due to higher rebates and lower chicken commodity prices in 2003 partially offset by lower gross margins on new menu items introduced during the last eighteen months. Taco Cabana cost of sales, as a percentage of Taco Cabana restaurant sales, increased slightly to 29.5% in the first nine months of 2003 from 29.4% in 2002 due to lower gross margins on promotional menu items in the third quarter partially offset by lower beef commodity prices in 2003 and higher rebates.

Restaurant wages and related expenses, as a percentage of total restaurant sales, increased to 30.3% in the first nine months of 2003 from 29.8% in 2002. Burger King restaurant wages and related expenses, as a percentage of Burger King restaurant sales, increased to 32.3% in the first nine months of 2003 from 31.2% in 2002 due to the effect of lower sales volumes on fixed labor costs and higher medical and workers compensation costs partially offset by restaurant productive labor efficiencies in the first nine months of 2003. Pollo Tropical restaurant wages and related expenses, as a percentage of Pollo Tropical restaurant sales, increased to 26.1% in the first nine months of 2003 from 25.7% in 2002 due to the effect of increases in fixed labor costs on basically flat comparable restaurant sales volumes and higher medical insurance costs. Taco Cabana restaurant wages and related expenses, as a percentage of Taco Cabana restaurant sales, decreased to 28.8% in the first nine months of 2003 from 29.2% in 2002 due to restaurant labor efficiencies in 2003 and, to a lesser extent, the closure of six lower volume Taco Cabana restaurants in the Phoenix, Arizona market in the first quarter of 2002.

Other restaurant operating expenses (which includes advertising), as a percentage of total restaurant sales, increased to 24.5% in the first nine months of 2003 from 23.7% in 2002. Burger King other restaurant operating expenses, as a percentage of Burger King restaurant sales, increased to 26.0% in the first nine months of 2003 from 25.4% in 2002 due to higher utility costs from increases in natural gas prices and the effect of lower sales volumes on fixed costs including occupancy. These were partially offset by lower discretionary restaurant operating expenses. Pollo Tropical other restaurant operating expenses, as a percentage of Pollo Tropical restaurant sales, increased to 21.0% in the first nine months of 2003 from 19.6% in 2002 due to higher utility costs and higher occupancy costs due to the sale/leaseback of six Pollo Tropical properties in 2003. Taco Cabana other restaurant operating expenses, as a percentage of Taco Cabana restaurant sales, increased to 23.5% in the first nine months of 2003 from 22.2% in 2002 due to higher utility costs and the effect of lower sales volumes on fixed costs.

28

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

General and administrative expenses increased $0.2 million to $28.4 million in the first nine months of 2003 compared to 2002. As a percentage of total restaurant sales, general and administrative expenses increased to 5.9% in the first nine months of 2003 from 5.7% in 2002.

EBITDA - EBITDA decreased to $56.1 million in the first nine months of 2003 from $65.4 million in 2002. As a percentage of total revenues, EBITDA margins decreased to 11.6% in the first nine months of 2003 compared to 13.1% in 2002 as a result of the factors discussed above. See Reconciliation of Non-GAAP Financial Measures on page 30.

Depreciation and Amortization - Depreciation and amortization increased $1.8 million in the first nine months of 2003 from 2002 due primarily to impairment charges of $.7 million related to property and equipment for certain of our Burger King restaurants and $1.9 million related to property and equipment for certain of our Taco Cabana restaurants.

Interest Expense - Interest expense decreased $1.6 million to $19.2 million in the first nine months of 2003 from $20.8 million in 2002 due primarily to lower average debt balances in 2003, and to a much lesser extent, lower effective interest rates on our floating rate debt. The average effective interest rate on all debt was 7.1% for the first nine months of 2003 compared to 7.3% in 2002.

Income Taxes - The provision for income taxes for the first nine months of 2003 was derived using an estimated effective income tax rate for 2003 of 43.6%. 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.

Net Income- As a result of the foregoing, net income decreased to $3.0 million for the first nine months of 2003 from $9.2 million in 2002.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Reconciliation of Non-GAAP Financial Measures

EBITDA is presented because we believe it is a useful financial indicator for measuring the ability to service and/or incur indebtedness. However, EBITDA should not be considered as an alternative to net income as a measure of operating results or to cash flows as a measure of liquidity in accordance with generally accepted accounting principles. A reconciliation of EBITDA to net income for the periods discussed above is as follows:

	2003		2002
Three months ended September 30:
EBITDA	$	19,718	$	21,802
Less: Depreciation and amortization expense		11,298		9,980
Interest expense		6,257		6,839
Provision for income taxes		976		1,793
Net income	$	1,187	$	3,190
Nine months ended September 30:
EBITDA	$	56,050	$	65,383
Less: Depreciation and amortization expense		31,531		29,776
Interest expense		19,249		20,822
Provision for income taxes		2,297		5,554
Net income	$	2,973	$	9,231

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; and

• servicing our debt

Our operations in the first nine months of 2003 generated approximately $35.2 million in cash, compared with $46.3 million in the first nine months of 2002.

In the first nine months of 2003, we sold twenty-six properties for $35.3 million in sale/leaseback transactions and sold four non-operating properties for $2.7 million. Proceeds from these sales were used to reduce debt. In the first nine months of 2002, we sold five properties for $5.1 million in sale/leaseback transactions and used the proceeds from these sales to reduce debt.

Capital expenditures represent a major investment of cash for us and were $26.6 million and $39.0 million in the first nine months of 2003 and 2002, respectively. Expenditures for new restaurant development were $16.8 million and $19.2 million in the first nine months of 2003 and 2002, respectively. Our capital expenditures also include remodeling costs and capital maintenance projects for the ongoing reinvestment and enhancement of our restaurants and totaled $8.6 million and $18.7 million in the first nine months of 2003 and 2002, respectively.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

In 2003, we anticipate total capital expenditures not to exceed $35 million. These amounts include approximately $20 million to $22 million for the construction of new restaurants and related real estate applicable to our three restaurant concepts as follows: $3.5 million for Burger King, $14 million to $16 million for Taco Cabana and $2.5 million for Pollo Tropical. We anticipate capital expenditures to remodel our existing restaurants for our three restaurant concepts to be approximately $3 million to $4 million in 2003. Capital maintenance expenditures in 2003 for ongoing reinvestment in our three restaurant concepts are anticipated to approximate $7 million; with approximately $2 million to $3 million applicable to our Burger King restaurants, $2 million for Pollo Tropical and $2 million to $3 million for Taco Cabana.

At September 30, 2003, we had total indebtedness of $317.7 million comprised of $170.0 million of unsecured 9.5% Senior Subordinated Notes due 2008, total borrowings under our senior credit facility of $145.7 million and other debt, primarily capital leases, of $2.0 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 revolving credit facility. At September 30, 2003, $129.0 million was outstanding under the term loan A and B facilities and $73.1 million was available for borrowing under our revolving credit facility, after reserving $10.2 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. The restaurant industry and we typically attempt to offset the effect of inflation, at least in part, through periodic menu price increases and various cost reduction programs. However, no assurance can be given that we will be able to offset such inflationary cost increases in the future.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

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, 2002, which is hereby incorporated by reference, with respect to the Company’s market risk sensitive instruments.

ITEM 4 – CONTROLS AND PROCEDURES

The Company’s senior management is responsible for establishing and maintaining a system of disclosure controls and procedures (as defined in Rule 13a-14 and 15d-14 under the Securities Exchange Act of 1934 (the “Exchange Act”)) designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Act is accumulated and communicated to the issuer’s management, including its principal executive officer or officers and principal financial officer or officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

In accordance with Exchange Act Rules 13a-15 and 15d-15, the Company carried out an evaluation, with the participation of the Chief Executive Officer and Chief Financial Officer, as well as other key members of the Company’s management, of the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective, as of the end of the period covered by this report, to provide reasonable assurance that information required to be disclosed in the Company’s reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

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PART II - OTHER INFORMATION

Item 1. Legal Proceedings

None

Item 2. Changes in Securities and Use of Proceeds

None

Item 3. Defaults Upon Senior Securities

None

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

None

Item 5. Other Information

None

Item 6. Exhibits and Reports on Form 8K

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

Exhibit No.
31.1	Chief Executive Officer’s Certificate Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Chief Financial Officer’s Certificate Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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.
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.

b. Report on Form 8-K

Form 8-K dated August 19, 2003 reporting the Registrant’s results of operations for the second quarter of 2003.

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SIGNATURES

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

	CARROLS CORPORATION
Date: November 12, 2003	/s/ Alan Vituli
	(Signature)
	Alan Vituli
	Chairman of the Board and Chief Executive Officer
Date: November 12, 2003	/s/ Paul R. Flanders
	(Signature)
	Paul R. Flanders
	Vice President – Chief Financial Officer and Treasurer

34