CARROLS CORP - 10-Q 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 June 30, 2004

¨	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 August 9, 2004 is 10.

PART I - FINANCIAL INFORMATION

ITEM 1 – FINANCIAL STATEMENTS

CARROLS CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands of dollars)


	June 30, 2004		December 31, 2003
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	3,326	$	2,414
Trade and other receivables, net		2,017		1,280
Inventories		5,158		4,936
Prepaid rent		2,681		2,534
Prepaid expenses and other current assets		4,015		4,043
Deferred income taxes		6,286		6,286

Total current assets		23,483		21,493

Property and equipment, at cost less accumulated depreciation of $214,730 and $194,652, respectively		215,982		236,353
Franchise rights, at cost less accumulated amortization of $52,892 and $50,732, respectively		84,024		86,148
Goodwill, at cost less accumulated amortization of $10,053 at both dates		123,861		123,861
Deferred income taxes		8,728		8,619
Other assets		11,528		10,400

Total assets	$	467,606	$	486,874

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

CARROLS CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (continued)

(in thousands of dollars)


	June 30, 2004		December 31, 2003
	(unaudited)
LIABILITIES and STOCKHOLDER’S EQUITY
Current liabilities:
Accounts payable	$	18,120	$	17,230
Accrued interest		1,373		1,549
Accrued payroll, related taxes and benefits		14,322		11,545
Accrued income taxes		1,565		836
Other liabilities		16,581		14,897
Current portion of long-term debt		13,885		14,005
Current portion of lease financing obligations		2,456		2,288

Total current liabilities		68,302		62,350
Long-term debt, net of current portion		251,579		281,827
Lease financing obligations, net of current portion		81,129		82,397
Deferred income – sale/leaseback of real estate		10,371		8,841
Accrued postretirement benefits		3,249		2,962
Other liabilities (Note 5)		27,574		27,527

Total liabilities		442,204		465,904
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		917		(3,515	)

Total stockholder’s equity		25,402		20,970

Total liabilities and stockholder’s equity	$	467,606	$	486,874

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

CARROLS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

THREE MONTHS ENDED JUNE 30, 2004 AND 2003

(in thousands of dollars)


	2004		Restated (Note 2) 2003
	(unaudited)
Revenues:
Restaurant sales	$	177,522	$	165,263
Franchise royalty revenues and fees		401		358

Total revenues		177,923		165,621
Costs and expenses:
Cost of sales		52,320		45,385
Restaurant wages and related expenses		51,671		49,780
Restaurant rent expense		8,723		7,532
Other restaurant operating expenses		22,859		22,449
Advertising expense		7,046		7,736
General and administrative		10,487		8,938
Depreciation and amortization		10,795		10,977
Impairment losses (Note 3)		308		607

Total operating expenses		164,209		153,404

Income from operations		13,714		12,217
Interest expense		7,324		8,287

Income before income taxes		6,390		3,930
Provision for income taxes (Note 4)		2,337		1,607

Net income	$	4,053	$	2,323

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

CARROLS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

SIX MONTHS ENDED JUNE 30, 2004 AND 2003

(in thousands of dollars)


	2004		Restated (Note 2) 2003
	(unaudited)
Revenues:
Restaurant sales	$	334,067	$	317,165
Franchise royalty revenues and fees		756		696

Total revenues		334,823		317,861
Costs and expenses:
Cost of sales		96,001		87,819
Restaurant wages and related expenses		99,522		96,824
Restaurant rent expense		17,287		15,350
Other restaurant operating expenses		44,749		43,812
Advertising expense		12,873		15,005
General and administrative		20,246		18,212
Depreciation and amortization		21,686		21,824
Impairment losses (Note 3)		569		645

Total operating expenses		312,933		299,491

Income from operations		21,890		18,370
Interest expense		14,901		16,643

Income before income taxes		6,989		1,727
Provision for income taxes (Note 4)		2,557		744

Net income	$	4,432	$	983

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

CARROLS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

SIX MONTHS ENDED JUNE 30, 2004 AND 2003

(in thousands of dollars)


	2004			Restated (Note 2) 2003
	(unaudited)
Cash flows provided from operating activities:
Net income	$	4,432		$	983
Adjustments to reconcile net income to net cash provided from operating activities:
Gain on sales of properties		(288	)		—
Depreciation and amortization		21,686			21,824
Impairment losses		569			645
Deferred income taxes		(109	)		248
Change in operating assets and liabilities		2,318			(1,966	)

Net cash provided from operating activities		28,608			21,734

Cash flows used for investing activities:
Capital expenditures:
New restaurant development		(3,517	)		(12,170	)
Restaurant remodeling		(479	)		(2,549	)
Other restaurant expenditures		(2,693	)		(3,822	)
Corporate and restaurant information systems		(362	)		(976	)

Total capital expenditures		(7,051	)		(19,517	)
Properties purchased for sale-leaseback		(924	)		—
Proceeds from sales of other properties		488			2,670

Net cash used for investing activities		(7,487	)		(16,847	)

Cash flows used for financing activities:
Borrowings (payments) on revolving credit facility, net		700			(19,800	)
Principal payments on term loans		(6,750	)		(2,750	)
Principal pre-payments on term loans		(24,000	)		—
Principal payments on lease financing obligations		(1,101	)		(986	)
Payments on other notes payable		(117	)		(519	)
Principal payments on capital leases		(201	)		(244	)
Proceeds from sale-leaseback transactions		11,260			19,439

Net cash used for financing activities		(20,209	)		(4,860	)

Increase in cash and cash equivalents		912			27
Cash and cash equivalents, beginning of period		2,414			2,538

Cash and cash equivalents, end of period	$	3,326		$	2,565

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

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands of dollars)

1.	Statement of Management

The accompanying unaudited consolidated financial statements for the three and six months ended June 30, 2004 and 2003 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 six months ended June 30, 2004 and 2003 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 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, 2003 contained in the Company’s 2003 Annual Report on Form 10-K. The December 31, 2003 balance sheet data is derived from those audited financial statements. As further discussed in Note 2 the Company restated its financial statements including applicable footnotes in its 2003 Annual Report on Form 10-K for periods ended prior to December 31, 2003. All previously reported amounts affected by the restatement that appear elsewhere in these footnotes to the consolidated financial statements have also been restated.

Certain amounts for prior periods have been reclassified to conform to the current year presentation.

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(in thousands of dollars)

2.	Restatement of Previously Issued Financial Statements

As previously reported in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003, the Company restated its financial statements including applicable footnotes for periods ended prior to December 31, 2003 to report real estate transactions for 86 restaurants consummated during 1991 to 2000 as financing transactions under SFAS No. 98 “Accounting for Leases” rather than as sale/leaseback transactions as previously reported. The impact of the restatement was to record on the Company’s balance sheets the property and equipment of the restaurants subject to these transactions and record the proceeds from these transactions (including the gains previously deferred), as a form of debt financing. The restatement also impacted our operating results by increasing the depreciation expense for the property and equipment subject to these transactions and recharacterizing the lease payments previously reported as rent expense for these restaurants as principal repayments and interest expense. There was no impact on sale/leaseback transactions that were consummated in 2002 and 2003.

The following table sets forth the previously reported amounts and the restated amounts reflected in the accompanying consolidated financial statements:


	Three Months Ended June 30, 2003				Six Months Ended June 30, 2003
	As Previously Reported		As Restated		As Previously Reported			As Restated
Consolidated Statement of Operations:
Restaurant rent expense	$	9,786	$	7,532	$	19,857		$	15,350
Depreciation and amortization		9,859		10,977		19,588			21,824
Total operating expenses		154,540		153,404		301,762			299,491
Income from operations		11,081		12,217		16,099			18,370
Interest expense		6,467		8,287		12,992			16,643
Income before income taxes		4,614		3,930		3,107			1,727
Provision for income taxes		1,893		1,607		1,321			744
Net income		2,721		2,323		1,786			983

					Six Months Ended June 30, 2003
					As Previously Reported			As Restated
Consolidated Statement of Cash Flows:
Net income					$	1,786		$	983
Depreciation and amortization						19,588			21,824
Deferred income taxes						825			248
Other changes in operating assets and liabilities						(2,096	)		(1,966	)
Net cash provided from operating activities						20,748			21,734
Principal payments on lease financing obligations						—			(986	)
Net cash used for financing activities						(3,874	)		(4,860	)

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(in thousands of dollars)

3.	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. The Company recorded impairment charges for its segments as follows:


	Three Months Ended June 30,				Six Months Ended June 30,
	2004		2003		2004		2003
Burger King	$	308	$	387	$	569	$	425
Taco Cabana		—		220		—		220

	$	308	$	607	$	569	$	645

4.	Income Taxes

The income tax provision for the six months ended June 30, 2004 and 2003 was comprised of the following:


	2004			2003 As Restated (Note 2)
Current	$	2,666		$	496
Deferred		(109	)		248

	$	2,557		$	744

The difference between the expected tax benefit, 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.

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(in thousands of dollars)

5.	Other Liabilities

Other long-term liabilities at June 30, 2004 and December 31, 2003 consisted of the following:


	June 30, 2004		December 31, 2003
Unearned purchase discounts	$	9,751	$	10,888
Accrued occupancy costs		8,273		8,012
Accrued workers compensation costs		4,371		3,848
Other		5,179		4,779

	$	27,574	$	27,527

6.	Stock-Based Compensation Disclosures Required by SFAS No. 123 and No. 148

Statement of Financial Accounting Standards (“SFAS”) 123, “Accounting for Stock-Based Compensation,” (SFAS 123), as amended by FAS 148, 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 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 $4,280 and $840 for the six months ended June 30, 2004 and 2003, respectively.

7.	Postretirement Benefits

The Company provides postretirement medical and life insurance benefits covering substantially all Burger King administrative and restaurant management salaried employees. In accordance with SFAS 132R, “Employers Disclosures about Pensions and Other Postretirement Benefits”, the following summarizes the components of net periodic benefit cost for the six months ended June 30, 2004 and 2003.


	2004			2003
Components of net periodic benefit cost:
Service cost	$	172		$	144
Interest cost		135			116
Amortization of gains and losses		31			18
Amortization of unrecognized prior service cost		(15	)		(15	)

Net periodic postretirement benefit cost	$	323		$	263

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(in thousands of dollars)

8.	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 Tex-Mex style food, including flame-grilled beef and chicken fajitas, quesadillas and other Tex-Mex dishes. Taco Cabana’s core markets are primarily in Texas.

The following table includes measures of segment profit or loss reported to the chief operating decision maker for purposes of allocating resources to the segments and assessing their performance. EBITDA is defined as earnings before interest, income taxes, depreciation and amortization and impairment losses.

The “Other” column includes corporate related items not allocated to reportable segments and for income from operations, principally corporate depreciation and amortization. Other identifiable assets consist primarily of franchise rights and intangible assets. Non-operating expenses, comprised of interest expense and interest income, are corporate related items and therefore have not been allocated to the reportable segments.

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(in thousands of dollars)


	Taco Cabana		Pollo Tropical		Burger King		Other			Consolidated
Three Months Ended:
June 30, 2004:
Revenues	$	51,612	$	31,014	$	95,297	$	—		$	177,923
Cost of sales		15,564		9,523		27,233		—			52,320
Restaurant wages and related expenses		14,553		7,775		29,343		—			51,671
Depreciation and amortization		2,715		1,156		5,927		997			10,795
EBITDA		6,705		7,499		10,613
Capital expenditures		1,595		352		1,804		196			3,947
June 30, 2003 (as restated):
Revenues	$	46,796	$	27,042	$	91,783	$	—		$	165,621
Cost of sales		13,703		8,135		23,547		—			45,385
Restaurant wages and related expenses		13,481		7,192		29,107		—			49,780
Depreciation and amortization		2,152		1,350		6,407		1,068			10,977
EBITDA		6,892		5,151		11,758
Capital expenditures		5,409		945		1,929		215			8,498
Six Months Ended:
June 30, 2004:
Revenues	$	97,759	$	60,638	$	176,426	$	—		$	334,823
Cost of sales		29,221		18,528		48,252		—			96,001
Restaurant wages and related expenses		27,847		14,885		56,790		—			99,522
Depreciation and amortization		5,430		2,304		12,059		1,893			21,686
EBITDA		12,998		14,748		16,399
Capital expenditures		3,577		583		2,529		362			7,051
June 30, 2003 (as restated):
Revenues	$	88,362	$	53,774	$	175,725	$	—		$	317,861
Cost of sales		25,764		16,405		45,650		—			87,819
Restaurant wages and related expenses		25,559		14,016		57,249		—			96,824
Depreciation and amortization		4,401		2,681		12,651		2,091			21,824
EBITDA		12,202		10,940		17,697
Capital expenditures		9,648		3,719		5,174		976			19,517
Identifiable Assets:
At June 30, 2004	$	65,363	$	42,502	$	196,878	$	162,863		$	467,606
At December 31, 2003		72,885		43,612		208,008		162,369			486,874
Year Ended December 31, 2003:
EBITDA	$	24,411	$	22,553	$	36,787
Year Ended December 31, 2002:
EBITDA		28,278		22,384		43,651
Year Ended December 31, 2001:
EBITDA		24,467		22,085		43,219

A reconciliation of our segment's EBITDA to consolidated net income is as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
	2004		2003		2004		2003
Segment EBITDA:
Taco Cabana	$	6,705	$	6,892	$	12,998	$	12,202
Pollo Tropical		7,499		5,151		14,748		10,940
Burger King		10,613		11,758		16,399		17,697

subtotal		24,817		23,801		44,145		40,839

Less: Depreciation and amortization		10,795		10,977		21,686		21,824
Impairment losses		308		607		569		645
Interest expense		7,324		8,287		14,901		16,643
Provision for income taxes		2,337		1,607		2,557		744

Net income	$	4,053	$	2,323	$	4,432	$	983


			Year Ended December 31,
			2003		2002		2001
Segment EBITDA:
Taco Cabana			$	24,411	$	28,278	$	24,467
Pollo Tropical				22,553		22,384		22,085
Burger King				36,787		43,651		43,219

subtotal				83,751		94,313		89,771

Less: Depreciation and amortization				43,102		42,766		47,388
Impairment losses				4,151		1,285		7,631
Interest expense				32,363		34,955		40,552
Provision for income taxes				1,767		5,593		274

Net income (loss)			$	2,368	$	9,714	$	(6,074	)

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(in thousands of dollars)

9.	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 includes consolidating balance sheets, statements of operations and statements of cash flows for the Parent Company only, Guarantor Subsidiaries and for the Company as of June 30, 2004 and December 31, 2003 and for the three and six months ended June 30, 2004 and 2003. 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 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.

For certain of the Company’s sale/leaseback transactions, Carrols Corporation has guaranteed on an unsecured basis the rental payments of its subsidiaries. In accordance with Emerging Issues Task Force Issue No. 90-14, “Unsecured Guarantee by Parent of Subsidiary’s Lease Payments in a Sale/Leaseback Transaction”, the Company has included in the following Guarantor Financial Statements amounts pertaining to these leases as of they were accounted for as financing transactions of the Guarantor subsidiaries. These adjustments are eliminated in consolidation.

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

CONSOLIDATING BALANCE SHEET

June 30, 2004

(in thousands of dollars)


	Parent Company Only		Guarantor Subsidiaries			Eliminations			Combined Total
ASSETS
Current Assets:
Cash and cash equivalents	$	803	$	2,523		$	—		$	3,326
Trade and other receivables, net		479		1,538			—			2,017
Inventories		3,597		1,561			—			5,158
Prepaid rent		1,328		1,353			—			2,681
Prepaid expenses and other current assets		1,208		2,807			—			4,015
Deferred income taxes		6,286		—			—			6,286

Total current assets		13,701		9,782			—			23,483
Property and equipment, net		107,466		135,049			(26,533	)		215,982
Franchise rights, net		84,024		—			—			84,024
Goodwill, net		1,449		122,412			—			123,861
Intercompany receivable (payable)		136,777		(136,777	)		—			—
Investment in subsidiaries		18,898		—			(18,898	)		—
Deferred income taxes		8,728		—			—			8,728
Other assets		9,926		3,011			(1,409	)		11,528

Total assets	$	380,969	$	133,477		$	(46,840	)	$	467,606

LIABILITIES AND STOCKHOLDER’S EQUITY
Current Liabilities:
Accounts payable	$	11,333	$	6,787		$	—		$	18,120
Accrued interest		1,373		—			—			1,373
Accrued payroll, related taxes and benefits		8,513		5,809			—			14,322
Other liabilities		9,000		7,581			—			16,581
Accrued income taxes		1,565		—			—			1,565
Current portion of long-term debt		13,626		259			—			13,885
Current portion of lease financing obligations		1,383		1,906			(833	)		2,456

Total current liabilities		46,793		22,342			(833	)		68,302
Long-term debt, net of current portion		251,063		516			—			251,579
Lease financing obligations, net of current portion		28,705		82,484			(30,060	)		81,129
Deferred income sale/leaseback of real estate		6,116		1,181			3,074			10,371
Accrued postretirement benefits		3,249		—			—			3,249
Other liabilities		19,641		7,843			90			27,574

Total liabilities		355,567		114,366			(27,729	)		442,204
Stockholder’s equity		25,402		19,111			(19,111	)		25,402

Total liabilities and stockholder’s equity	$	380,969	$	133,477		$	(46,840	)	$	467,606

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

CONSOLIDATING BALANCE SHEET

December 31, 2003

(in thousands of dollars)


	Parent Company Only		Guarantor Subsidiaries			Eliminations			Combined Total
ASSETS
Current Assets:
Cash and cash equivalents	$	708	$	1,706		$	—		$	2,414
Trade and other receivables, net		372		908			—			1,280
Inventories		3,413		1,523			—			4,936
Prepaid rent		1,309		1,225			—			2,534
Prepaid expenses and other current assets		1,150		2,893			—			4,043
Deferred income taxes		6,286		—			—			6,286

Total current assets		13,238		8,255			—			21,493
Property and equipment, net		118,489		142,060			(24,196	)		236,353
Franchise rights, net		86,148		—			—			86,148
Goodwill, net		1,473		122,388			—			123,861
Intercompany receivable (payable)		147,675		(147,675	)		—			—
Investment in subsidiaries		14,206		—			(14,206	)		—
Deferred income taxes		8,619		—			—			8,619
Other assets		6,163		5,584			(1,347	)		10,400

Total assets	$	396,011	$	130,612		$	(39,749	)	$	486,874

LIABILITIES AND STOCKHOLDER’S EQUITY
Current Liabilities:
Accounts payable	$	10,918	$	6,312		$	—		$	17,230
Accrued interest		1,549		—			—			1,549
Accrued payroll, related taxes and benefits		6,826		4,719			—			11,545
Other liabilities		6,757		8,140			—			14,897
Accrued income taxes		836		—			—			836
Current portion of long-term debt		13,758		247			—			14,005
Current portion of lease financing obligations		1,292		1,723			(727	)		2,288

Total current liabilities		41,936		21,141			(727	)		62,350
Long-term debt, net of current portion		281,176		651			—			281,827
Lease financing obligations, net of current portion		29,418		80,290			(27,311	)		82,397
Deferred income sale/leaseback of real estate		3,673		2,192			2,976			8,841
Accrued postretirement benefits		2,962		—			—			2,962
Other liabilities		15,876		11,621			30			27,527

Total liabilities		375,041		115,895			(25,032	)		465,904
Stockholder’s equity		20,970		14,717			(14,717	)		20,970

Total liabilities and stockholder’s equity	$	396,011	$	130,612		$	(39,749	)	$	486,874

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

CONSOLIDATING STATEMENT OF OPERATIONS

Three Months Ended June 30, 2004

(in thousands of dollars)

(unaudited)


	Parent Company Only			Guarantor Subsidiaries		Eliminations			Combined Total
Revenues:
Restaurant sales	$	95,297		$	82,225	$	—		$	177,522
Franchise royalty revenues and fees		—			401		—			401

Total revenues		95,297			82,626		—			177,923

Costs and expenses:
Cost of sales		27,233			25,087		—			52,320
Restaurant wages and related expenses		29,343			22,328		—			51,671
Restaurant rent expense		5,658			2,409		656			8,723
Other restaurant operating expenses		13,023			9,836		—			22,859
Advertising expense		3,688			3,358		—			7,046
General and administrative		5,740			4,747		—			10,487
Depreciation and amortization		6,657			4,487		(349	)		10,795
Impairment losses		308			—		—			308

Total operating expenses		91,650			72,252		307			164,209

Income from operations		3,647			10,374		(307	)		13,714
Interest expense		6,165			1,635		(476	)		7,324
Intercompany allocations		(4,556	)		4,556		—			—

Income before income taxes		2,038			4,183		169			6,390
Provision for income taxes		525			1,812		—			2,337
Equity income from subsidiaries		2,540			—		(2,540	)		—

Net income	$	4,053		$	2,371	$	(2,371	)	$	4,053

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

CONSOLIDATING STATEMENT OF OPERATIONS

Three Months Ended June 30, 2003

(in thousands of dollars)

(unaudited)


	Parent Company Only			Guarantor Subsidiaries			Eliminations			As Restated (Note 2) Combined Total
Revenues:
Restaurant sales	$	91,783		$	73,480		$	—		$	165,263
Franchise royalty revenues and fees		—			358			—			358

Total revenues		91,783			73,838			—			165,621

Costs and expenses:
Cost of sales		23,547			21,838			—			45,385
Restaurant wages and related expenses		29,107			20,673			—			49,780
Restaurant rent expense		5,107			2,216			209			7,532
Other restaurant operating expenses		12,926			9,523			—			22,449
Advertising expense		4,113			3,623			—			7,736
General and administrative		4,915			3,875			148			8,938
Depreciation and amortization		7,260			3,808			(91	)		10,977
Impairment losses		387			220			—			607

Total operating expenses		87,362			65,776			266			153,404

Income from operations		4,421			8,062			(266	)		12,217
Interest expense		7,072			1,371			(156	)		8,287
Intercompany allocations		(18,655	)		18,655			—			—

Income (loss) before income taxes		16,004			(11,964	)		(110	)		3,930
Provision (benefit) for income taxes		5,300			(3,693	)		—			1,607
Equity income (loss) from subsidiaries		(8,381	)		—			8,381			—

Net income (loss)	$	2,323		$	(8,271	)	$	8,271		$	2,323

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

CONSOLIDATING STATEMENT OF OPERATIONS

Six Months Ended June 30, 2004

(in thousands of dollars)

(unaudited)


	Parent Company Only			Guarantor Subsidiaries		Eliminations			Combined Total
Revenues:
Restaurant sales	$	176,426		$	157,641	$	—		$	334,067
Franchise royalty revenues and fees		—			756		—			756

Total revenues		176,426			158,397		—			334,823

Costs and expenses:
Cost of sales		48,252			47,749		—			96,001
Restaurant wages and related expenses		56,790			42,732		—			99,522
Restaurant rent expense		11,066			4,912		1,309			17,287
Other restaurant operating expenses		25,706			19,043		—			44,749
Advertising expense		6,949			5,924		—			12,873
General and administrative		11,265			8,981		—			20,246
Depreciation and amortization		13,482			8,878		(674	)		21,686
Impairment losses		569			—		—			569

Total operating expenses		174,079			138,219		635			312,933

Income from operations		2,347			20,178		(635	)		21,890
Interest expense		12,578			3,269		(946	)		14,901
Intercompany allocations		(9,112	)		9,112		—			—

Income (loss) before income taxes		(1,119	)		7,797		311			6,989
Provision (benefit) for income taxes		(858	)		3,415		—			2,557
Equity income from subsidiaries		4,693			—		(4,693	)		—

Net income	$	4,432		$	4,382	$	(4,382	)	$	4,432

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

CONSOLIDATING STATEMENT OF OPERATIONS

Six Months Ended June 30, 2003

(in thousands of dollars)

(unaudited)


	Parent Company Only			Guarantor Subsidiaries			Eliminations			As Restated (Note 2) Combined Total
Revenues:
Restaurant sales	$	175,725		$	141,440		$	—		$	317,165
Franchise royalty revenues and fees		—			696			—			696

Total revenues		175,725			142,136			—			317,861

Costs and expenses:
Cost of sales		45,650			42,169			—			87,819
Restaurant wages and related expenses		57,249			39,575			—			96,824
Restaurant rent expense		10,563			4,398			389			15,350
Other restaurant operating expenses		26,070			17,742			—			43,812
Advertising expense		8,012			6,993			—			15,005
General and administrative		10,484			7,550			178			18,212
Depreciation and amortization		14,316			7,675			(167	)		21,824
Impairment losses		425			220			—			645

Total operating expenses		172,769			126,322			400			299,491

Income from operations		2,956			15,814			(400	)		18,370
Interest expense		14,223			2,712			(292	)		16,643
Intercompany allocations		(20,391	)		20,391			—			—

Income (loss) before income taxes		9,124			(7,289	)		(108	)		1,727
Provision (benefit) for income taxes		2,611			(1,867	)		—			744
Equity income (loss) from subsidiaries		(5,530	)		—			5,530			—

Net income (loss)	$	983		$	(5,422	)	$	5,422		$	983

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

CONSOLIDATING STATEMENT OF CASH FLOWS

Six Months Ended June 30, 2004

(in thousands of dollars)

(unaudited)


	Parent Company Only			Guarantor Subsidiaries			Eliminations			Combined Total
Cash flows provided from operating activities:
Net income (loss)	$	(259	)	$	4,380		$	311		$	4,432
Adjustments to reconcile net income (loss) to net cash provided from (used for) operating activities:
Gain on sales of properties		(288	)		—			—			(288	)
Depreciation and amortization		13,482			8,878			(674	)		21,686
Impairment losses		569			—			—			569
Deferred income taxes		(109	)		—			—			(109	)
Changes in operating assets and liabilities		15,747			(13,398	)		(31	)		2,318

Net cash provided from (used for) operating activities		29,142			(140	)		(394	)		28,608

Cash flow used for investing activities:
Capital expenditures:
New restaurant development		(931	)		(2,586	)		—			(3,517	)
Restaurant remodeling		(479	)		—			—			(479	)
Other restaurant expenditures		(1,119	)		(1,574	)		—			(2,693	)
Corporate and restaurant information systems		(255	)		(107	)		—			(362	)

Total capital expenditures		(2,784	)		(4,267	)		—			(7,051	)
Properties purchased for sale-leaseback		(924	)		—			—			(924	)
Proceeds from sales of other properties		488			—			—			488

Net cash used for investing activities		(3,220	)		(4,267	)		—			(7,487	)

Cash flows provided from (used for) financing activities:
Borrowings from revolving credit facility, net		700			—			—			700
Principal payments on term loans		(6,750	)		—			—			(6,750	)
Principal pre-payments on term loans		(24,000	)		—			—			(24,000	)
Principal payments on lease financing obligations		(622	)		(873	)		394			(1,101	)
Payments on other notes payable, net		(117	)		—			—			(117	)
Principal payments on capital leases		(78	)		(123	)		—			(201	)
Proceeds from lease financing obligations, net		—			3,250			(3,250	)		—
Financing costs associated with lease financing obligations		—			(98	)		98			—
Proceeds from sale/leaseback transactions		5,040			3,068			3,152			11,260

Net cash provided from (used for) financing activities		(25,827	)		5,224			394			(20,209	)

Net increase in cash and cash equivalents		95			817			—			912
Cash and cash equivalents, beginning of year		708			1,706			—			2,414

Cash and cash equivalents, end of year	$	803		$	2,523		$	—		$	3,326

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

CONSOLIDATING STATEMENT OF CASH FLOWS

Six Months Ended June 30, 2003

(in thousands of dollars)

(unaudited)


	Parent Company Only			Guarantor Subsidiaries			Eliminations			As Restated (Note 2) Combined Total
Cash flows provided from (used for) operating activities:
Net income (loss)	$	6,513		$	(5,422	)	$	(108	)	$	983
Adjustments to reconcile net income (loss) to net cash provided from operating activities:
Loss on disposal of property and equipment		—			(178	)		178			—
Depreciation and amortization		14,316			7,675			(167	)		21,824
Impairment losses		425			220			—			645
Deferred income taxes		248			—			—			248
Changes in operating assets and liabilities		1,214			(3,166	)		(14	)		(1,966	)

Net cash provided from operating activities		22,716			(871	)		(111	)		21,734

Cash flow used for investing activities:
Capital expenditures:
New restaurant development		(1,613	)		(10,557	)		—			(12,170	)
Restaurant remodeling		(2,402	)		(147	)		—			(2,549	)
Other restaurant expenditures		(1,159	)		(2,663	)		—			(3,822	)
Corporate and restaurant information systems		(774	)		(202	)		—			(976	)

Total capital expenditures		(5,948	)		(13,569	)		—			(19,517	)
Proceeds from sales of other properties		—			2,670			—			2,670

Net cash used for investing activities		(5,948	)		(10,899	)		—			(16,847	)

Cash flows provided from (used for) financing activities:
Payments on revolving credit facility, net		(19,800	)		—			—			(19,800	)
Principal payments on term loans		(2,750	))		—			—			(2,750	)
Principal payments on lease financing obligations		(546	)		(551	)		111			(986	)
Proceeds from lease financing obligations, net		—			13,080			(13,080	)		—
Financing costs associated with lease financing obligations		—			(721	)		721			—
Payments on other notes payable		(519	)		—			—			(519	)
Principal payments on capital leases		(95	)		(149	)		—			(244	)
Proceeds from sale/leaseback transactions		7,058			22			12,359			19,439

Net cash (used for) provided from financing activities		(16,652	)		11,681			111			(4,860	)

Net increase (decrease) in cash and cash equivalents		116			(89	)		—			27
Cash and cash equivalents, beginning of period		715			1,823			—			2,538

Cash and cash equivalents, end of period	$	831		$	1,734		$	—		$	2,565

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. Those statements include statements regarding the intent, belief or current expectations of the Company and its management team. Investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those projected in the forward-looking statements. Such risks and uncertainties include, among other things, competitive conditions, economic and regulatory factors, general economic conditions particularly at the retail level, fluctuations in commodity prices, availability of restaurant supply and distribution of product, liquidity of major distributors, labor and employee benefit costs, the outcome of pending or yet-to-be instituted legal proceedings, the ability of the Company to manage its growth and successfully implement its business strategy, environmental conditions and regulations, weather conditions, significant disruptions in service or supply by any of our suppliers, risks associated with the expansion of our business, general risks associated with the food industry, our inability to integrate any businesses we acquire, our borrowing costs and credit ratings, which may be influenced by credit ratings of our competitors, the risk of events similar to those of September 11, 2001 or an outbreak or escalation of any insurrection or armed conflict involving the United States or any other national or international calamity, factors that affect the food industry generally, including recalls if products became adulterated or misbranded, liability if product consumption causes injury, ingredient disclosure and labeling laws and regulations and the possibility that consumer could lose confidence in the safety and quality of certain food products, as well as recent publicity concerning the health implications of obesity and transfatty acids, the availability and terms of necessary or desirable financing or refinancing and other risks and uncertainties that are discussed herein and in our Annual Report on Form 10-K for the year ended December 31, 2003.

We use a 52-53 week fiscal year ending on the Sunday closest to December 31. For convenience, all references herein to the fiscal years ended December 29, 2002 and December 28, 2003 will be referred to as the fiscal years ended December 31, 2002 and 2003, respectively. Similarly, all references herein to the three and six months ended June 29, 2003 and June 27, 2004 will be referred to as the three and six months ended June 30, 2003 and June 30, 2004, respectively. Our fiscal years ended December 31, 2001, 2002 and 2003 each contained 52 weeks.

Overview

We are one of the largest restaurant companies in the United States operating 536 restaurants in 16 states as of June 30, 2004. We operate three restaurant brands that provide balance through diversification of our restaurant concepts and geographic dispersion. We own and operate two regional Hispanic Brand restaurant companies: Taco Cabana and Pollo Tropical. We are also the largest Burger King franchisee in the world and have operated Burger King restaurants since 1976.

Restatement

We restated our financial statements, including applicable footnotes, for periods ended prior to December 31, 2003 to report real estate transactions for 86 restaurants consummated during 1991 to 2000 as financing transactions under SFAS No. 98, “Accounting for Leases”, rather than as sale/leaseback transactions.

The restatement was due to lease provisions in certain of our sale/leaseback transactions, which in our opinion have minimal commercial impact upon the relevant terms of the leases. Had we been aware of the potential impact of the provisions upon our financial statements, we believe that both the respective lessors and we would have agreed to exclude those provisions from each lease without affecting any of the material terms of such leases. We may amend these leases in the future to address these provisions and to qualify them for treatment as operating leases as originally intended. However, we cannot assure you as to when or whether any or all of such leases will be amended.

The impact of the restatement was to record on our balance sheets the property and equipment of the restaurants subject to these transactions and record the proceeds from these transactions (including the gains previously deferred) as a form of debt financing. The restatement also impacted our financial results by increasing the depreciation expense for the property and equipment subject to these transactions and recharacterizing the lease payments previously accounted for as rent expense for these restaurants as principal repayments and interest expense. In addition, the restatement had no impact on our liquidity and net cash flow. There was no impact on sale/leaseback transactions that were consummated in 2002 and 2003.

As a result of the restatement of our previously issued financial statements discussed above, we were in default related to certain required financial leverage ratios and other covenants under our senior secured credit facility. We obtained a waiver from our senior secured lenders of any prior non-compliance and defaults resulting from the restatement. In addition, our senior secured credit facility was amended to exclude all adjustments resulting from this restatement on our financial covenant requirements and to treat, on a prospective basis, the specified leases as if no restatement or recharacterization has occurred.

See Note 2 to the consolidated financial statements included elsewhere in this Form 10Q for a complete discussion of the restatement. Amounts affected by the restatement that appear in our Management’s Discussion and Analysis of Financial Condition and Results of Operations below have also been restated.

Initial Public Offering

On June 22, 2004 our parent company, Carrols Holdings Corporation (Holdings), filed a registration statement on Form S-1 to register an initial public offering of Enhanced Yield Securities (EYSs) and senior subordinated notes to be sold separately. The EYSs will be comprised of senior subordinated notes and Class A common stock of Holdings. Holdings has no independent assets or operations other than our capital stock. The new senior subordinated notes will be

guaranteed on a full and unconditional, joint and several, and unsecured senior subordinated basis by us and each of our existing domestic subsidiaries and all future domestic subsidiaries that are borrowers or become guarantors under the new credit facility to be entered into by Carrols in connection with such offering or any successor credit facility. Any guarantees will rank equally with all subsidiary guarantors’ other unsecured senior subordinated indebtedness, and will be subordinated in right of payment to any subsidiary guarantors’ senior indebtedness, including their guarantees under the new credit facility.

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 us.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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, as noted below, are inherent in the assessment and recording of accrued occupancy costs, insurance liabilities, legal obligations, income taxes and the valuation of goodwill 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.

Accrued occupancy costs. 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. At June 30, 2004 we had four non-operating properties.

Insurance liabilities. We are self-insured for most workers’ compensation, general liability and medical insurance claims. At June 30, 2004 we had $9.4 million accrued for these 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, including the ability to estimate the future development of incurred claims based on historical trends, differences between actual future events and prior estimates and assumptions could result in adjustments to these liabilities.

Legal obligations. 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.

Income taxes. 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.

Goodwill valuation. We must evaluate our recorded intangible assets for impairment under Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets,” on an ongoing basis. We have elected to conduct our annual impairment review of goodwill and other intangible assets at December 31. Our review at December 31, 2003 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.

Results of Operations

Three Months Ended June 30, 2004 Compared to Three Months Ended June 30, 2003

Since June 30, 2003 we have opened two new Burger King restaurants, closed one Burger King restaurant, opened seven Taco Cabana restaurants and closed two Taco Cabana restaurants.

The following table sets forth, for the three months ended June 30, 2004 and 2003, selected operating results as a percentage of total restaurant sales:


	2004		2003
Restaurant sales:
Burger King	53.7	%	55.5	%
Pollo Tropical	17.3	%	16.2	%
Taco Cabana	29.0	%	28.3	%

	100.0	%	100.0	%
Costs and expenses:
Cost of sales	29.5	%	27.5	%
Restaurant wages and related expenses	29.1	%	30.1	%
Restaurant rent expense	4.9	%	4.6	%
Other restaurant operating expenses	12.9	%	13.6	%
Advertising expense	4.0	%	4.7	%
General and administrative	5.9	%	5.4	%
Income from restaurant operations	7.5	%	7.2	%

Restaurant Sales. Total restaurant sales for the second quarter of 2004 increased $12.2 million, or 7.4%, to $177.5 million from $165.3 million in the second quarter of 2003 due to sales increases at each of our restaurant concepts. Taco Cabana restaurant sales increased $4.8 million, or 10.3%, to $51.5 million in the second quarter of 2004 due to a 5.2% sales increase at our comparable Taco

Cabana restaurants and the net addition of five restaurants during the second quarter of 2004. Taco Cabana comparable restaurant sales in the second quarter of 2004 increased from higher customer traffic, an increase in the average sales transaction compared to the second quarter of 2003 and, to a lesser extent, menu price increases of approximately 1%, which occurred early in the first quarter of 2004. Pollo Tropical restaurant sales increased $3.9 million, or 14.7%; in the second quarter of 2004 to $30.7 million due to a 14.1% sales increase at our comparable Pollo Tropical restaurants, which resulted primarily from increases in customer traffic. Burger King restaurant sales increased $3.5 million, or 3.8%, to $95.3 million in the second quarter of 2004 due to an increase in comparable restaurant sales of 4.2%. The sales increase for our Burger King restaurants in the second quarter of 2004 was driven by an increase in the average sales transaction of 5.8% due to the introductory promotions of premium sandwiches. There were no significant menu price increases in the first six months of 2004 for our Burger King and Pollo Tropical restaurants.

Operating Costs and Expenses. Cost of sales (food and paper costs), as a percentage of total restaurant sales, increased to 29.5% in the second quarter of 2004 from 27.5% in the second quarter of 2003. Taco Cabana cost of sales, as a percentage of Taco Cabana restaurant sales, increased to 30.2% in the second quarter of 2004 from 29.3% in the second quarter of 2003 due primarily to higher beef commodity prices in 2004, offset partially by a modest price increase of 1.0% early in the first quarter of 2004. Pollo Tropical cost of sales, as a percentage of Pollo Tropical restaurant sales, increased to 31.0% in the second quarter of 2004 from 30.4% in the first quarter of 2003 due primarily to lower rebates and an increase in chicken commodity prices in 2004 of 3.0%, offset in part by improvements in restaurant food controls. Burger King cost of sales, as a percentage of Burger King restaurant sales, increased to 28.6% in the second quarter of 2004 from 25.7% in the second quarter of 2003 due primarily to a 16% increase in beef commodity prices and, to a much lesser extent, higher promotional sales discounts in the second quarter of 2004.

Restaurant wages and related expenses, as a percentage of total restaurant sales, decreased to 29.1% in the second quarter of 2004 from 30.1% in the second quarter of 2003. Taco Cabana restaurant wages and related expenses, as a percentage of Taco Cabana restaurant sales, decreased to 28.3% in the second quarter of 2004 from 28.9% in the second quarter of 2003 due to the menu price increase in the first quarter of 2004 and the effect on fixed labor costs of higher comparable restaurant sales volumes. Pollo Tropical restaurant wages and related expenses, as a percentage of Pollo Tropical restaurant sales, decreased significantly to 25.3% in the second quarter of 2004 from 26.8% in the second quarter of 2003 due to restaurant productive labor efficiencies and the effect on fixed labor costs of higher comparable restaurant sales volumes. Burger King restaurant wages and related expenses, as a percentage of Burger King restaurant sales, decreased to 30.8% in the second quarter of 2004 from 31.7% in 2003 due to the effects of higher sales volumes on fixed labor costs and lower restaurant incentive bonuses (0.6% of Burger King sales).

Other restaurant operating expenses, as a percentage of total restaurant sales, decreased to 12.9% in the second quarter of 2004 from 13.6% in the second quarter of 2003. Taco Cabana other restaurant operating expenses, as a percentage of Taco Cabana restaurant sales, decreased slightly to 13.1% in the second quarter of 2004 from 13.2% in the second quarter of 2003 due to the effect of higher sales volumes on fixed operating costs. Pollo Tropical other restaurant operating expenses, as a percentage of Pollo Tropical restaurant sales, decreased to 10.0% in the second quarter of 2004 from 12.5% in the

second quarter of 2003 due to lower liability insurance claim costs (1.1% of Pollo Tropical sales), lower utility costs (0.4% of Pollo Tropical sales), a gain related to a closed restaurant location (0.4% of Pollo Tropical sales) and the effects of higher sales volumes on fixed operating costs. Burger King other restaurant operating expenses, as a percentage of Burger King restaurant sales, decreased to 13.7% in the second quarter of 2004 from 14.1% in the second quarter of 2003 due to lower repair and maintenance expenses (0.2% of Burger King sales) and the effect of higher sales volumes on fixed costs.

Advertising expense, as a percentage of total restaurant sales, decreased to 4.0% in the second quarter of 2004 from 4.7% in the second quarter of 2003. Taco Cabana advertising expense, as a percentage of Taco Cabana restaurant sales, increased to 5.9% in the second quarter of 2004 from 5.4% in the second quarter of 2003 due to the timing of promotions in 2004 compared to the prior year. Pollo Tropical advertising expense, as a percentage of Pollo Tropical restaurant sales, decreased significantly to 1.0% in the second quarter of 2004 from 4.1% in the second quarter of 2003 due to lower television and radio advertising expenditures. We anticipate our Pollo Tropical advertising expense for all of 2004, as a percentage of Pollo Tropical restaurant sales, to range from 2.0% to 2.5%, which is lower than historical levels due to the reduced advertising levels in the first half of 2004. Burger King advertising expense, as a percentage of Burger King restaurant sales, decreased to 3.9% in the second quarter of 2004 from 4.5% in the second quarter of 2003 due to lower local advertising expenditures.

Restaurant rent expense, as a percentage of total restaurant sales, increased to 4.9% in the second quarter of 2004 from 4.6% in the second quarter of 2003 due to sale/leaseback transactions completed in 2003, and to a lesser extent, those completed in 2004.

General and administrative expenses, as a percentage of total restaurant sales, increased to 5.9% in the second quarter of 2004 from 5.4% in the second quarter of 2003 and increased $1.5 million to $10.5 million due primarily to increased administrative bonus levels of $1.3 million.

Depreciation and Amortization and Impairment Losses. Depreciation and amortization expense decreased to $10.8 million in the second quarter of 2004 from $11.0 million in the second quarter of 2003 due primarily to lower equipment depreciation at our Burger King restaurants. Impairment losses were $0.3 million in the second quarter of 2004 and were related to certain underperforming Burger King restaurants. Impairment losses were $0.6 million in the second quarter of 2003 and were related to certain underperforming Burger King restaurants and one Taco Cabana restaurant.

Interest Expense. Interest expense decreased $1.0 million to $7.3 million in the second quarter of 2004 from $8.3 million in the second quarter of 2003 due to lower average debt balances in 2004. We used our operating cash flows and the net proceeds from our sale/leaseback transactions in 2003 and 2004 to reduce outstanding debt under our senior credit facility. In the second quarter of 2004, interest expense on long-term debt, which excludes lease financing obligations, was $5.5 million compared to $6.5 million in the second quarter of 2003. The weighted average interest rate on long-term debt for the three months ended June 30, 2004 and 2003 was 7.7% and 7.1%, respectively. Interest expense on lease financing obligations was $1.8 million in both the second quarter of 2004 and 2003.

Income Taxes. The provision for income taxes for the second quarter of 2004 was derived using an estimated effective annual income tax rate for 2004 of 36.6%. This rate was higher than our anticipated federal statutory tax rate of 35% in 2004 due to state franchise taxes and non-deductible amortization of certain franchise rights.

Net Income. As a result of the foregoing, net income in the second quarter of 2004 was $4.1 million compared to $2.3 million in the second quarter of 2003.

Six Months Ended June 30, 2004 Compared to Six Months Ended June 30, 2003

The following table sets forth, for the six months ended June 30, 2004 and 2003, selected operating results as a percentage of total restaurant sales:


	2004		2003
Restaurant sales:
Burger King	52.8	%	55.4	%
Pollo Tropical	18.0	%	16.8	%
Taco Cabana	29.2	%	27.8	%

	100.0	%	100.0	%
Costs and expenses:
Cost of sales	28.7	%	27.7	%
Restaurant wages and related expenses	29.8	%	30.5	%
Restaurant rent expense	5.2	%	4.8	%
Other restaurant operating expenses	13.4	%	13.8	%
Advertising expense	3.9	%	4.7	%
General and administrative	6.1	%	5.7	%
Income from restaurant operations	6.3	%	5.6	%

Restaurant Sales. Total restaurant sales for the first six months of 2004 increased $16.9 million, or 5.3%, to $334.1 million from $317.2 million in the first six months of 2003 due primarily to sales increases at our two Hispanic restaurant concepts. Taco Cabana restaurant sales increased $9.4 million, or 10.6%, to $97.5 million in the first six months of 2004 due in part to a 4.9% sales increase at our comparable Taco Cabana restaurants and the net addition of eight restaurants since the beginning of 2003. Taco Cabana comparable restaurant sales in the first six months of 2004 increased from higher customer traffic, an increase in the average sales transaction compared to the first six months of 2003 and, to a lesser extent, menu price increases of approximately 1% which occurred early in the first quarter of 2004. Pollo Tropical restaurant sales increased $6.8 million, or 12.8%, in the first six months of 2004 to $60.1 million due primarily to an 11.0% sales increase at our comparable Pollo Tropical restaurants that resulted from increases in customer traffic. Burger King restaurant sales increased by $0.7 million to $176.4 million in the first six months of 2004 based on a slight increase in comparable restaurant sales of 0.7%. Increases in the average sales transaction at our Burger King restaurants in the first six months of 2004 compared to the first six months of 2003 from the introductory promotions of premium sandwiches were substantially offset by reduced customer traffic, most notably in the first quarter of 2004. There were no significant menu price increases in the first six months of 2004 for our Burger King or Pollo Tropical restaurants.

Operating Costs and Expenses. Cost of sales (food and paper costs), as a percentage of total restaurant sales, increased to 28.7% in the first six months of 2004 from 27.7% in the first six months of 2003. Taco Cabana cost of sales, as a percentage of Taco Cabana restaurant sales, increased to 30.0% in the first six months of 2004 from 29.2% in the first six months of 2003 due to higher beef commodity prices in 2004, offset partially by a modest price increase of 1.0% early in the first quarter of 2004. Pollo Tropical cost of sales, as a percentage of Pollo Tropical restaurant sales, was 30.8% in both the first six months of 2004 and 2003 as improvements in restaurant food controls offset an increase in chicken commodity prices in 2004 of 3.0% and lower vendor rebates in 2004. Burger King cost of sales, as a percentage of Burger King restaurant sales, increased to 27.3% in the first six months of 2004 from 26.0% in the first six months of 2003 due to a 15.6% increase in beef commodity prices offset slightly by lower promotional sales discounts in 2004, primarily in the first quarter.

Restaurant wages and related expenses, as a percentage of total restaurant sales, decreased to 29.8% in the first six months of 2004 from 30.5% in the first six months of 2003. Taco Cabana restaurant wages and related expenses, as a percentage of Taco Cabana restaurant sales, decreased to 28.5% in the first six months of 2004 from 29.0% in the first six months of 2003 due to the price increase in the first quarter of 2004 and the effect on fixed labor costs of higher comparable restaurant sales volumes. Pollo Tropical restaurant wages and related expenses, as a percentage of Pollo Tropical restaurant sales, decreased significantly to 24.8% in the first six months of 2004 from 26.3% in the first six months of 2003 due to restaurant productive labor efficiencies and the effect on fixed labor costs of higher comparable restaurant sales volumes. Burger King restaurant wages and related expenses, as a percentage of Burger King restaurant sales, decreased to 32.2% in the first six months of 2004 from 32.6% in 2003 due to lower restaurant incentive bonuses (0.3% of Burger King sales) and restaurant labor efficiencies (0.3% of Burger King sales) offset in part by higher workers compensation and medical insurance costs (0.3% of Burger King sales).

Other restaurant operating expenses, as a percentage of total restaurant sales, decreased to 13.4% in the first six months of 2004 from 13.8% in the first six months of 2003. Taco Cabana other restaurant operating expenses, as a percentage of Taco Cabana restaurant sales, increased slightly to 13.1% in the first six months of 2004 from 13.0% in the first six months of 2003 due to increased restaurant repair and maintenance expenses. Pollo Tropical other restaurant operating expenses, as a percentage of Pollo Tropical restaurant sales, decreased to 10.5% in the first six months of 2004 from 11.7% in the first six months of 2003 due to lower liability insurance claim costs (0.6% of Pollo Tropical sales), lower utility costs (.2% of Pollo Tropical sales), a gain related to a closed restaurant location (0.2%) and the effect of higher sales volumes on fixed operating costs. Burger King other restaurant operating expenses, as a percentage of Burger King restaurant sales, decreased to 14.6% in the first six months of 2004 from 14.8% in the first six months of 2003 due to lower repair and maintenance expenses.

Advertising expense, as a percentage of total restaurant sales, decreased to 3.9% in the first six months of 2004 from 4.7% in the first six months of 2003. Taco Cabana advertising expense, as a percentage of Taco Cabana restaurant sales, decreased to 5.3% in the first six months of 2004 from 5.5% in the first six months of 2003 due to the timing of promotions in 2004 compared to the prior year. Pollo Tropical advertising expense, as a percentage of Pollo Tropical restaurant sales, decreased significantly to 1.3% in the first six months of 2004 from 4.0% in the first six months of 2003 due to

lower television and radio advertising expenditures. We anticipate our Pollo Tropical advertising expense for all of 2004, as a percentage of Pollo Tropical restaurant sales, to range from 2.0% to 2.5%, which is lower than historical levels. Burger King advertising expense, as a percentage of Burger King restaurant sales, decreased to 3.9% in the first six months of 2004 from 4.6% in the first six months of 2003 due to lower local advertising expenditures.

Restaurant rent expense, as a percentage of total restaurant sales, increased to 5.2% in the first six months of 2004 from 4.8% in the first six months of 2003 due to sale/leaseback transactions completed in 2003, and to a lesser extent, those completed in 2004.

General and administrative expenses, as a percentage of total restaurant sales, increased to 6.1% in the first six months of 2004 from 5.7% in the first six months of 2003 and increased $2.0 million to $20.2 million due primarily to increased administrative bonus levels of $1.9 million.

Depreciation and Amortization and Impairment Losses. Depreciation and amortization expense decreased to $21.7 million in the first six months of 2004 from $21.8 million in the first six months of 2003 due primarily to lower equipment depreciation at our Burger King restaurants. Impairment losses were $0.6 million in the first six months of 2004 and were related to certain underperforming Burger King restaurants. Impairment losses were $0.6 million in the first six months of 2003 and pertained to certain underperforming Burger King restaurants and one Taco Cabana restaurant.

Interest Expense. Interest expense decreased $1.7 million to $14.9 million in the first six months of 2004, from $16.6 million in the first six months of 2003 due to lower average debt balances in 2004. We used our operating cash flows and the net proceeds from our sale/leaseback transactions in 2003 and 2004 to reduce outstanding debt under our senior credit facility. In addition to scheduled principal payments required under our senior credit facility, we prepaid $24.0 million of outstanding principal during the six months ended June 30, 2004. In the first six months of 2004, interest expense on long-term debt, which excludes lease financing obligations, was $11.3 million compared to $13.0 million in the first six months of 2003. The weighted average interest rate on long-term debt for the first six months of 2004 and 2003 was 7.6% and 7.1%, respectively. Interest expense on lease financing obligations was $3.6 million and $3.7 in the first six months of 2004 and 2003, respectively.

Income Taxes. The provision for income taxes for the first six months of 2004 was derived using an estimated effective annual income tax rate for 2004 of 36.6%. This rate was higher than our anticipated federal statutory tax rate of 35% in 2004 due to state franchise taxes and non-deductible amortization of certain franchise rights.

Net Income. As a result of the foregoing, net income in the first six months of 2004 was $4.4 million compared to $1.0 million in the first six months of 2003.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.

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 have arisen from:

•

servicing our debt;

•

ongoing capital reinvestment in our existing restaurants; and

•

financing the opening and equipping of new restaurants.

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.

Operating activities. Net cash provided by operating activities for the six months ended June 30, 2004 and 2003 was $28.6 million and $21.7 million, respectively. Our income tax payments included in operating activities have been historically reduced due to the utilization of net operating loss carryforwards. As of December 31, 2003, we had remaining net operating loss carryforwards for federal income tax purposes of $5.3 million, federal alternative minimum tax credit carryforwards of $3.7 million and federal work opportunity tax credit carryforwards of $2.6 million.

Investing activities including capital expenditures. Net cash used for investing activities for the six months ended June 30, 2004 and 2003 was $7.5 million and $16.8 million, respectively. Capital expenditures represent a major investment of cash for us, and for the six months ended June 30, 2004 and 2003, were $7.1 million and $19.5 million, respectively. In the first six months of 2004 we sold an excess land parcel for net proceeds of $0.5 million and in the first six months of 2003 we sold four non-operating properties for net proceeds of $2.7 million. The net proceeds from these sales were used to reduce outstanding debt under our senior credit facility.

Our capital expenditures primarily include (1) restaurant maintenance, (2) restaurant remodeling and (3) new restaurant development. Capital maintenance expenditures include expenditures for the ongoing reinvestment and enhancement of our restaurants. Remodeling expenditures include expenditures for renovating and in some cases rebuilding the interior and exterior of our existing restaurants, which in the past have generally been expenditures associated with franchise renewals with respect to our Burger King restaurants. Expenditures for new restaurant development are associated with developing new restaurants including the purchase of related real estate. The following table sets forth our capital expenditures for the periods presented:


	Taco Cabana		Pollo Tropical		Burger King		Consolidated
	(Dollars in thousands)
Six Months Ended June 30, 2003:
Restaurant maintenance	$	1,225	$	1,438	$	1,159	$	3,822
Restaurant remodeling		121		26		2,402		2,549
New restaurant development		8,302		2,255		1,613		12,170
Other capital expenditures		81		121		774		976

Total capital expenditures	$	9,729	$	3,840	$	5,948	$	19,517
Number of new restaurants		4		2		1		7
Six Months Ended June 30, 2004:
Restaurant maintenance	$	991	$	583	$	1,119	$	2,693
Restaurant remodeling		—		—		479		479
New restaurant development		2,586		—		931		3,517
Other capital expenditures		50		57		255		362

Total capital expenditures	$	3,627	$	640	$	2,784	$	7,051
Number of new restaurants		3		0		1		4

In 2004, we anticipate total capital expenditures of approximately $20 million to $22 million. These capital expenditures include approximately $11 million to $12 million for the development of new restaurants and purchase of related real estate applicable to our three restaurant concepts. Capital expenditures in 2004 also include expenditures of approximately $8 million to $9 million for the ongoing reinvestment in our three restaurant concepts for remodeling costs and capital maintenance expenditures and approximately $1.0 million in other capital expenditures.

Financing activities including sale/leaseback transactions. Net cash used for financing activities for the six months ended June 30, 2004 and 2003 was $20.2 million and $4.9 million, respectively. Financing activities in these periods consisted primarily of borrowings and repayments under our debt arrangements and sales of restaurant properties in sale/leaseback transactions.

In the first six months of 2004, we sold eight restaurant properties in sale/leaseback transactions for net proceeds of $11.3 million. In the first six months of 2003 we sold fifteen restaurant properties in sale/leaseback transactions for net proceeds of $19.4 million. The net proceeds from all such sales were used to reduce outstanding debt under our senior credit facility. For all of 2004, we anticipate that our net proceeds from sale/leaseback transactions will be approximately $15 million.

Existing indebtedness. At June 30, 2004, we had total debt of $349.0 million comprised of $170.0 million of unsecured 9.5% Senior Subordinated Notes due 2008, borrowings under our senior credit facility of $94.0 million, lease financing obligations of $83.6 million and other debt, primarily capital leases, of $1.4 million. Our senior credit facility provides for a $70 million term loan A facility, an $80 million term loan B facility and a $50 million revolving credit facility. During the six months ended June 30, 2004 we made voluntary principal prepayments on our term A and term B debt of $24.0 million. At June 30, 2004, $92.7 million was outstanding under the term loan A and B facilities and $1.3 million was outstanding under our revolving credit facility. We elected to reduce our revolving credit facility from $100 million to $50 million on May 5, 2004. At June 30, 2004, $38.1 million was available for borrowings under our revolving credit facility, after reserving $10.6 million for letters of credit guaranteed by the facility, subject to meeting certain financial ratio tests required under the senior credit facility.

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 and state hourly minimum wage rates. Accordingly, changes in the federal and state hourly minimum wage rates directly affect our labor costs. 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. We cannot assure you that we will be able to offset such inflationary cost increases in the future.

Recent Accounting Pronouncements

In January 2003, the FASB issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities”, an interpretation of Accounting Research Bulletin (ARB) No. 51 (FIN 46). FIN 46 is intended to clarify the application of the majority voting interest requirement of ARB No. 51, “Consolidated Financial Statements”, to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The controlling financial interest may be achieved through arrangements that do not involve voting interests. A company that holds variable interests in an entity will need to consolidate the variable interest entity (VIE) 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. FIN 46 may be applied prospectively with a cumulative-effect

adjustment as of the date on which it is first applied or by restating previously issued financial statements for one or more years with a cumulative-effect adjustment as of the beginning of the first year restated. FIN 46 is effective immediately for a VIE created or obtained after January 31, 2003. FIN 46, as amended, became effective for variable interests in a VIE created before February 1, 2003 as of December 31, 2003.

FIN 46 has been subsequently modified, clarified and replaced by the issuance of FIN 46R on December 23, 2003. Relative to FIN 46, FIN 46R (a) essentially excludes operating businesses from its provisions subject to four conditions, (b) states the provisions of FIN 46R are not required to be applied if a company is unable, subject to making an exhaustive effort, to obtain the necessary information, (c) includes new definitions and examples of what variable interests are, (d) clarifies and changes the definition of a variable interest entity and (e) clarifies and changes the definition and treatment of de facto agents, as that term is defined in FIN 46 and FIN 46R. FIN 46R was issued December 23, 2003 and, for us, is effective in 2004. We reviewed the provisions of FIN 46R and determined that it does not have a material effect on our financial statements.

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, 2003 with respect to the Company’s market risk sensitive instruments.

ITEM 4 – CONTROLS AND PROCEDURES

Our senior management is responsible for establishing and maintaining a system of disclosure controls and procedures (as defined in Rule 13a – 15(e) and 15d – 15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the 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, we carried out an evaluation, with the participation of the Chief Executive Officer and Chief Financial Officer, as well as other key members of our management, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report, to provide reasonable assurance that information required to be disclosed in our 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.

No change occurred in our internal controls concerning financial reporting during the second quarter of 2004 that materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

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 and Issuer Purchases of Equity Securities

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

Item 6.

Exhibits and Reports on Form 8-K

(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		Certificate Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certificate Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(b) Reports on Form 8-K filed during the reported quarter.

Date Filed

or Furnished

Item
Number

Description

April 16, 2004

5 and 7

Announced restatement of previously reported financial statements.

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: August 11, 2004				/s/ Alan Vituli
				(Signature)
				Alan Vituli
				Chairman of the Board and Chief Executive Officer

Date: August 11, 2004				/s/ Paul R. Flanders
				(Signature)
				Paul R. Flanders
				Vice President – Chief Financial Officer and Treasurer