Edgar Filing: CARROLS RESTAURANT GROUP, INC.

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2007

¨	TRANSITION REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 001-33174

CARROLS RESTAURANT GROUP, INC.

(Exact name of Registrant as specified in its charter)


Delaware		16-1287774
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

968 James Street Syracuse, New York		13203
(Address of principal executive office)		(Zip Code)

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

Securities registered pursuant to Section 12(b) of the Act:

Title of each class:

Name on each exchange on which registered:

Common Stock, Carrols Restaurant Group, Inc.,

par value $.01 per share

The NASDAQ Global Market

Securities registered pursuant to Section 12(g) of the Act: None

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

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: None

Carrols Corporation meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this form with reduced disclosure format pursuant to General Instruction H(2) of Form 10-Q.

Indicate by check mark whether either of the registrants (1) have 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 were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days.

Yes x No ¨

Indicate by check mark whether the registrants are large accelerated filers, accelerated filers, or non-accelerated filers. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act, (Check one):

Large accelerated filers ¨ Accelerated filers ¨ Non-accelerated filers x

Indicate by check mark whether either of the registrants are shell companies (as defined in Rule 12b-2 of the Exchange Act) Yes ¨ No x

As of November 2, 2007, Carrols Restaurant Group, Inc. had 21,550,827 shares of its common stock, $.01 par value outstanding. As of November 2, 2007, all outstanding equity securities of Carrols Corporation, which consisted of 10 shares of its common stock, were owned by Carrols Restaurant Group, Inc.

CARROLS RESTAURANT GROUP, INC.

FORM 10-Q

QUARTER ENDED SEPTEMBER 30, 2007


		Page
PART I	FINANCIAL INFORMATION

Item 1	Carrols Restaurant Group, Inc. and Subsidiary - Consolidated Financial Statements (unaudited):

	Consolidated Balance Sheets as of September 30, 2007 and December 31, 2006	3

	Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2007 and 2006	4

	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2007 and 2006	5

	Notes to Consolidated Financial Statements	6

	Carrols Corporation and Subsidiaries - Consolidated Financial Statements (unaudited):

	Consolidated Balance Sheets as of September 30, 2007 and December 31, 2006	17

	Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2007 and 2006	18

	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2007 and 2006	19

	Notes to Consolidated Financial Statements	20

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	40

Item 3	Quantitative and Qualitative Disclosures About Market Risk	56

Item 4	Controls and Procedures	57

PART II	OTHER INFORMATION

Item 1	Legal Proceedings	57

Item 1A	Risk Factors	57

Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	57

Item 3	Default Upon Senior Securities	57

Item 4	Submission of Matters to a Vote of Security Holders	57

Item 5	Other Information	57

Item 6	Exhibits	58

PART I—FINANCIAL INFORMATION

ITEM 1—INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

CARROLS RESTAURANT GROUP, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(In thousands of dollars, except share and per share amounts)

(Unaudited)


	September 30,			December 31,
	2007			2006
ASSETS
Current assets:
Cash and cash equivalents	$	7,622		$	3,939
Trade and other receivables		4,720			5,364
Inventories		4,939			4,677
Prepaid rent		2,755			4,130
Prepaid expenses and other current assets		6,990			5,367
Refundable income taxes		—			2,806
Deferred income taxes		4,549			4,539

Total current assets		31,575			30,822
Property and equipment, net		195,121			182,742
Franchise rights, net (Note 4)		80,856			83,268
Goodwill (Note 4)		124,934			124,934
Intangible assets, net (Note 4)		959			1,175
Franchise agreements, at cost less accumulated amortization of $5,562 and $5,431, respectively		5,683			5,793
Deferred income taxes		11,445			11,136
Other assets		12,181			12,989

Total assets	$	462,754		$	452,859

LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Current portion of long-term debt (Note 5)	$	1,654		$	2,477
Accounts payable		21,068			17,860
Accrued interest		3,539			7,861
Accrued payroll, related taxes and benefits		17,670			18,445
Accrued income taxes payable		331			—
Accrued real estate taxes		4,037			4,102
Other liabilities		11,791			10,623

Total current liabilities		60,090			61,368
Long-term debt, net of current portion (Note 5)		300,881			297,432
Lease financing obligations (Note 9)		54,393			58,571
Deferred income—sale-leaseback of real estate		30,428			31,391
Accrued postretirement benefits (Note 8)		6,948			6,370
Other liabilities (Note 7)		23,196			23,494

Total liabilities		475,936			478,626
Commitments and contingencies (Note 12)
Stockholders’ deficit:
Preferred stock, par value $.01; authorized 20,000,000 shares, issued and outstanding--none		—			—
Voting common stock, par value $.01; authorized 100,000,000 shares, issued and outstanding—21,550,827 shares at both dates		216			216
Additional paid-in capital		(2,061	)		(3,108	)
Accumulated deficit		(10,195	)		(21,733	)
Accumulated other comprehensive loss		(1,001	)		(1,001	)
Treasury stock, at cost		(141	)		(141	)

Total stockholders’ deficit		(13,182	)		(25,767	)

Total liabilities and stockholders’ deficit	$	462,754		$	452,859

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

CARROLS RESTAURANT GROUP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006

(In thousands of dollars, except share and per share amounts)

(Unaudited)


	Three months ended September 30,						Nine months ended September 30,
	2007			2006			2007			2006
Revenues:
Restaurant sales	$	203,181		$	189,254		$	591,164		$	561,719
Franchise royalty revenues and fees		328			343			997			1,002

Total revenues		203,509			189,597			592,161			562,721


Costs and expenses:
Cost of sales		58,866			53,000			169,062			158,299
Restaurant wages and related expenses (including stock- based compensation expense of $45, $0, $121 and $0, respectively)		59,519			55,047			174,029			164,007
Restaurant rent expense		11,101			9,004			32,687			27,183
Other restaurant operating expenses		30,276			28,577			86,230			82,466
Advertising expense		7,458			6,608			24,442			20,768
General and administrative (including stock-based compensation expense of $314, $0, $ 947 and $0, respectively)		12,327			11,841			38,778			36,192
Depreciation and amortization		8,107			8,397			23,685			25,177
Impairment losses (Note 3)		1,810			588			1,879			832
Other income (Note 10)		(303	)		(1,389	)		(650	)		(1,389	)

Total operating expenses		189,161			171,673			550,142			513,535

Income from operations		14,348			17,924			42,019			49,186
Interest expense		7,690			10,216			23,647			34,616
Loss on extinguishment of debt (Note 5)		—			—			1,485			—

Income before income taxes		6,658			7,708			16,887			14,570
Provision for income taxes (Note 6)		1,795			2,580			5,349			4,828

Net income	$	4,863		$	5,128		$	11,538		$	9,742

Basic and diluted net income per share (Note 13)	$	0.23		$	0.32		$	0.54		$	0.61

Basic weighted average common shares outstanding (Note 13)		21,550,827			15,887,186			21,550,827			15,892,329
Diluted weighted average common shares outstanding (Note 13)		21,555,020			15,887,186			21,559,524			15,892,329

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

CARROLS RESTAURANT GROUP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006

(In thousands of dollars)

(Unaudited)


	2007			2006
Cash flows provided from operating activities:
Net income	$	11,538		$	9,742
Adjustments to reconcile net income to net cash provided from operating activities:
Gain on disposals of property and equipment		(57	)		—
Stock-based compensation expense		1,068			—
Depreciation and amortization		23,685			25,177
Amortization of deferred financing costs		940			1,098
Amortization of unearned purchase discounts		(1,616	)		(1,616	)
Amortization of deferred gains from sale-leaseback transactions		(1,460	)		(897	)
Impairment losses		1,879			832
Gain on settlements of lease financing obligations		(163	)		(120	)
Accretion of interest on lease financing obligations		397			281
Deferred income taxes		(319	)		159
Loss on extinguishment of debt		1,485			—
Changes in other operating assets and liabilities		3,987			2,196

Net cash provided from operating activities		41,364			36,852

Cash flows used for investing activities:
Capital expenditures:
New restaurant development		(26,241	)		(20,370	)
Restaurant remodeling		(5,850	)		(4,885	)
Other restaurant capital expenditures		(6,825	)		(5,478	)
Corporate and restaurant information systems		(1,840	)		(1,324	)

Total capital expenditures		(40,756	)		(32,057	)
Properties purchased for sale-leaseback		(2,461	)		(2,663	)
Proceeds from sale-leaseback transactions		7,036			31,693
Proceeds from sales of other properties		1,623			—

Net cash used for investing activities		(34,558	)		(3,027	)

Cash flows used for financing activities:
Repayment of term loans under prior credit facility		(118,400	)		—
Borrowings on revolving credit facility		45,500			—
Repayments on revolving credit facility		(44,300	)		—
Proceeds from new senior credit facility		120,000			—
Scheduled principal payments on term loans		—			(1,650	)
Principal pre-payments on term loans		—			(23,200	)
Principal payments on capital leases		(262	)		(305	)
Expenses from initial public offering		(21	)		—
Financing costs associated with issuance of debt		(1,228	)		—
Settlement of lease financing obligations		(4,412	)		(15,215	)

Net cash used for financing activities		(3,123	)		(40,370	)

Net increase (decrease) in cash and cash equivalents		3,683			(6,545	)
Cash and cash equivalents, beginning of period		3,939			9,331

Cash and cash equivalents, end of period	$	7,622		$	2,786

Supplemental disclosures:
Interest paid on long-term debt	$	22,932		$	24,752
Interest paid on lease financing obligations	$	3,700		$	8,665
Increase (decrease) in accruals for capital expenditures	$	(348	)	$	601
Income taxes paid, net	$	3,064		$	2,753
Non-cash reduction of assets under lease financing obligations due to lease amendments	$	—		$	24,707
Non-cash reduction of lease financing obligations due to lease amendments	$	—		$	37,544
Capital lease obligations incurred	$	88		$	—

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

CARROLS RESTAURANT GROUP, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands of dollars except share and per share amounts)

1. Basis of Presentation

Basis of Consolidation. The unaudited consolidated financial statements presented herein include the accounts of Carrols Restaurant Group, Inc. (“Carrols Restaurant Group” or the “Company”) and its wholly-owned subsidiary Carrols Corporation (“Carrols”). Carrols Restaurant Group is a holding company and conducts all of its operations through Carrols and its wholly-owned subsidiaries. Unless the context otherwise requires, Carrols Restaurant Group, Carrols and the direct and indirect subsidiaries of Carrols are collectively referred to as the “Company.” All intercompany transactions have been eliminated in consolidation.

The difference between the consolidated financial statements of Carrols Restaurant Group and Carrols is primarily due to additional rent expense of approximately $6 per year for Carrols Restaurant Group and the composition of stockholders’ deficit.

Business Description. At September 30, 2007 the Company operated, as franchisee, 325 quick-service restaurants under the trade name “Burger King” in 12 Northeastern, Midwestern and Southeastern states. At September 30, 2007, the Company also owned and operated 83 Pollo Tropical restaurants of which 80 were located in Florida and three were located in the New York City metropolitan area and franchised a total of 27 Pollo Tropical restaurants, consisting of 23 in Puerto Rico, two in Ecuador and two on college campuses in Florida. At September 30, 2007, the Company owned and operated 147 Taco Cabana restaurants located primarily in Texas and franchised two Taco Cabana restaurants in New Mexico and one in Georgia.

Fiscal Year. The Company uses a 52-53 week fiscal year ending on the Sunday closest to December 31. All references herein to the fiscal years ended December 31, 2006 and January 1, 2006 will be referred to as the fiscal years ended December 31, 2006 and 2005, respectively. Similarly, all references herein to the three and nine months ended September 30, 2007 and October 1, 2006 will be referred to as the three and nine months ended September 30, 2007 and September 30, 2006, respectively. The years ended December 31, 2006 and 2005 each contained 52 weeks and the three and nine months ended September 30, 2007 and 2006 contained 13 and 39 weeks, respectively.

Basis of Presentation. The accompanying unaudited consolidated financial statements for the three and nine months ended September 30, 2007 and 2006 have been prepared without an audit, pursuant to the rules and regulations of the Securities and Exchange Commission and do not include certain of the information and the footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all normal and recurring adjustments considered necessary for a fair presentation of such financial statements have been included. The results of operations for the three and nine months ended September 30, 2007 and 2006 are not necessarily indicative of the results to be expected for the full year.

These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2006 contained in the Company’s 2006 Annual Report on Form 10-K. The December 31, 2006 balance sheet data is derived from those audited financial statements.

Use of Estimates. The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Significant items subject to such estimates include: accrued occupancy costs, insurance liabilities, legal obligations, income taxes, evaluation for impairment of goodwill, long-lived assets and Burger King franchise rights, lease accounting matters and stock-based compensation. Actual results could differ from those estimates.

CARROLS RESTAURANT GROUP, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

(in thousands of dollars except share and per share amounts)

2. Stock-Based Compensation

The Company adopted an incentive stock plan in 2006 (the “2006 Plan”) under which incentive stock options, non-qualified stock options and restricted shares may be granted to employees and non-employee directors. In December 2006, the Company granted incentive stock options, non-qualified stock options and restricted shares under the 2006 Plan. The stock options granted to employees generally vest 20% per year and expire seven years from the date of grant. Restricted shares granted to employees generally vest 33% per year for three years and restricted shares granted to non-employee directors generally vest at 20% per year.

Stock-based compensation related to these grants was $0.4 million and $1.1 million in the three and nine months ended September 30, 2007, respectively and the income tax benefit recognized in the consolidated statement of operations for stock-based compensation was $0.1 million and $0.3 million for the three and nine months ended September 30, 2007, respectively. There were no stock options issued or stock-based compensation expense recorded in the three or nine months ended September 30, 2006.

As of September 30, 2007, the total non-vested stock-based compensation expense relating to the stock options and restricted stock was approximately $4.5 million and the Company expects to record an additional $0.4 million as compensation expense for the remainder of 2007. The remaining weighted average vesting period for the stock options is 3.64 years and for the restricted shares is approximately 2.77 years at September 30, 2007.

Stock Options

A summary of all option activity for the nine months ended September 30, 2007 was as follows:


	2006 Plan
	Number of Options		Weighted Average Exercise Price		Average Remaining Contractual Life	Aggregate Intrinsic Value (in thousands) (1)



Options outstanding at January 1, 2007	1,241,750		$	14.30
Options granted	10,500			15.81
Options forfeited	(25,800	)		14.30

Options outstanding at September 30, 2007	1,226,450		$	14.31	6.26	$	—

Expected to vest at September 30, 2007	1,210,360		$	14.31	6.26	$	—

Options exercisable at September 30, 2007	—		$	—	—	$	—

(1)	The aggregate intrinsic value was calculated using the difference between the market price of the Company’s common stock at September 30, 2007 and the exercise price for only those awards that have an exercise price that is less than the market price of the Company’s common stock at September 30.

CARROLS RESTAURANT GROUP, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

(in thousands of dollars except share and per share amounts)

Restricted Shares

The restricted stock activity for the nine months ended September 30, 2007 was as follows:


	Shares		Weighted Average Grant Date Fair Value



Nonvested at January 1, 2007	75,800		$	13.00
Shares granted	8,200		$	14.58
Shares forfeited	(5,700	)	$	13.05

Nonvested at September 30, 2007	78,300		$	13.16

The fair value of restricted shares granted is determined based on the Company’s closing stock price on the date of grant.

3. Impairment of Long-Lived Assets

The Company reviews its long-lived assets, principally property and equipment, for impairment at the restaurant level. If an indicator of impairment exists for any of its assets, an estimate of undiscounted future cash flows from the related long-lived assets is compared to that long-lived asset’s carrying value. If the carrying value is greater than the undiscounted cash flow, the Company then determines the fair value of the asset. If an asset is determined to be impaired, the loss is measured by the excess of the carrying amount of the asset over its fair value.

During the third quarter of 2007 the Company impaired an underperforming Pollo Tropical restaurant located in Brooklyn, New York for $1.7 million. This restaurant was subsequently closed in the fourth quarter of 2007.

For the three and nine months ended September 30, 2007 and 2006, the Company recorded impairment losses on long-lived assets for its segments as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
	Three Months Ended September 30,				Nine Months Ended September 30,
	2007		2006		2007		2006
Burger King	$	54	$	—	$	68	$	224
Pollo Tropical		1,657		—		1,657		—
Taco Cabana		99		588		154		608

	$	1,810	$	588	$	1,879	$	832

4. Goodwill, Franchise Rights and Intangible Assets

Goodwill. Goodwill is reviewed for impairment annually, or more frequently when events and circumstances indicate that the carrying amounts may be impaired. The Company performs its annual impairment assessment as of December 31 and does not believe circumstances have changed since the last assessment date which would make it necessary to reassess their values. Goodwill balances are summarized below:


	Pollo Tropical		Taco Cabana		Burger King		Total
	Pollo Tropical		Taco Cabana		Burger King		Total
Goodwill at September 30, 2007 and December 31, 2006	$	56,307	$	67,177	$	1,450	$124,934

Burger King Franchise Rights. Amounts allocated to franchise rights for each Burger King acquisition are amortized using the straight-line method over the average remaining term of the acquired franchise agreements at January 1, 2002 plus one twenty-year renewal period. The Company assesses the potential impairment of franchise rights whenever events or changes in circumstances indicate that the carrying value may not be recoverable. If an indicator of impairment exists, an estimate of the aggregate undiscounted future cash flows from the acquired restaurants is compared to the respective carrying value of franchise rights for each Burger King acquisition. If an asset is determined to be impaired, the loss is measured by the excess of the carrying amount of the asset over its fair value. There were no impairment charges related to franchise rights for the three and nine months ended September 30, 2007 and 2006.

CARROLS RESTAURANT GROUP, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

(in thousands of dollars except share and per share amounts)

Amortization expense related to Burger King franchise rights was $805 and $804 for the three months ended September 30, 2007 and 2006, respectively. Amortization expense related to Burger King franchise rights was $2,412 for both of the nine months ended September 30, 2007 and 2006, respectively. The estimated amortization expense for the year ending December 31, 2007 and for each of the five succeeding years is $3,216.

Intangible Assets. The Company acquired four Taco Cabana restaurants from a franchisee in 2005. Under Emerging Issues Task Force Issue No. 04-1, “Accounting for Preexisting Relationships between the Parties to a Business Combination” (“EITF 04-1”), certain reacquired rights, including the right to the acquirer’s trade name, are required to be recognized as intangible assets apart from goodwill. The Company allocated $1.6 million of the purchase price to this intangible asset. The Company recorded amortization expense relating to the intangible asset of approximately $72 for each of the three months ended September 30, 2007 and 2006, respectively. Amortization for each of the nine months ended September 30, 2007 and 2006 was $216. The Company expects the annual amortization expense for the year ending December 31, 2007 and for each of the five years ending 2008 through 2012 to be $289, $211, $133, $125, $117 and $99, respectively.

September 30, 2007

December 31, 2006

Gross

Carrying

Accumulated

Carrying

Accumulated

Amount

Amortization

Amount

Amortization

Intangible assets

1,610

651

1,610

435

5. Long-Term Debt

Long-term debt at September 30, 2007 and December 31, 2006 consisted of the following:


	September 30,			December 31,
	2007			2006
Collateralized:
Revolving Credit facility	$	1,200		$	—
Senior Credit Facility-Term loan B facility		—			118,400
Senior Credit Facility-Term loan A facility		120,000
Unsecured:
9% Senior Subordinated Notes		180,000			180,000
Capital leases		1,335			1,509

		302,535			299,909
Less: current portion		(1,654	)		(2,477	)

	$	300,881		$	297,432

On March 9, 2007, Carrols terminated its senior credit facility and entered into a new senior credit facility with a syndicate of lenders. Carrols’ new senior credit facility totals approximately $185 million, consisting of $120 million principal amount of term loan A borrowings maturing on March 8, 2013 (or earlier on September 30, 2012 if Carrols’ 9% Senior Subordinated Notes due 2013 are not refinanced by June 30, 2012) and a $65.0 million revolving facility (including a sub limit of up to $25.0 million for letters of credit and up to $5.0 million for swingline loans), maturing on March 8, 2012. The term loan A borrowings and an additional $4.3 million of revolver borrowings from this facility were used to repay all outstanding borrowings and other obligations under Carrols’ prior senior credit facility and to pay certain fees and expenses incurred in connection with the new senior credit facility. The Company also recorded a $1.5 million loss on extinguishment of debt in the nine months ended September 30, 2007 for the write-off of deferred financing costs related to the prior senior credit facility.

Both term loan and revolving credit borrowings under the new senior credit facility bear interest at a per annum rate, at Carrols’ option, of either:

1) the applicable margin ranging from 0% to 0.25% based on Carrols’ senior leverage ratio (as defined in the new senior credit facility) plus the greater of (i) the prime rate or (ii) the federal funds rate for that day plus 0.5%; or

2) Adjusted LIBOR plus the applicable margin percentage in effect ranging from 1.0% to 1.5% based on Carrols’ senior leverage ratio.

CARROLS RESTAURANT GROUP, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

(in thousands of dollars except share and per share amounts)

Term loan A borrowings shall be due and payable in quarterly installments, beginning on June 30, 2008 as follows:

1) four quarterly installments of $1.5 million beginning on June 30, 2008;

2) eight quarterly installments of $3.0 million beginning on June 30, 2009;

3) four quarterly installments of $4.5 million beginning on June 30, 2011; and

4) four quarterly installments of $18.0 million beginning on June 30, 2012.

Under the new senior credit facility, Carrols is also required to make mandatory prepayments of principal on term loan A facility borrowings (a) annually in an amount up to 50% of Excess Cash Flow depending upon Carrols’ Total Leverage Ratio (as such terms are defined in the new senior credit facility), (b) in the event of certain dispositions of assets (all subject to certain exceptions) and insurance proceeds, in an amount equal to 100% of the net proceeds received by Carrols therefrom, and (c) in an amount equal to 100% of the net proceeds from any subsequent issuance of debt.

In general, Carrols’ obligations under the new senior credit facility are guaranteed by the Company and all of Carrols’ material subsidiaries and are collateralized by a pledge of Carrols’ common stock and the stock of each of Carrols’ material subsidiaries. The new senior credit facility contains certain covenants, including, without limitation, those limiting the Carrols’ ability to incur indebtedness, incur liens, sell or acquire assets or businesses, change the nature of its business, engage in transactions with related parties, make certain investments or pay dividends. In addition, Carrols is required to meet certain financial ratios, including fixed charge coverage, senior leverage, and total leverage ratios (all as defined under the new senior credit facility). The Company was in compliance with the covenants under its senior credit facility as of September 30, 2007.

At September 30, 2007, $120.0 million principal amount of term loan borrowings were outstanding under the term loan A facility and $1.2 million of borrowings were outstanding under the revolving credit facility. After reserving $16.0 million for letters of credit guaranteed by the facility, $47.8 million was available for borrowings under the revolving credit facility at September 30, 2007.

On December 15, 2004, Carrols issued $180 million of 9% Senior Subordinated Notes due 2013, which are referred to herein as the “senior subordinated notes”. Restrictive covenants under the senior subordinated notes include limitations with respect to the Carrols’ ability to issue additional debt, incur liens, sell or acquire assets or businesses, pay dividends and make certain investments. At both September 30, 2007 and December 31, 2006, $180.0 million principal amount of the senior subordinated notes was outstanding.

6. Income Taxes

The income tax provision for the three and nine months ended September 30, 2007 and 2006 was comprised of the following:


	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2007			2006		2007			2006
Current	$	1,904		$	1,072	$	5,668		$	4,669
Deferred		(109	)		1,508		(319	)		159

	$	1,795		$	2,580	$	5,349		$	4,828

The provision for income taxes for the three and nine months ended September 30, 2007 was derived using an estimated effective annual income tax rate for 2007 of 36.5% as well as the effect of any discrete tax items occurring in those periods. In addition to the discrete tax adjustment discussed in the following paragraph, the Company also recorded in the three months ended September 30, 2007 a reduction of tax expense of $0.2 million related to a reduction of valuation allowances for deferred taxes pertaining to state net operating loss carry forwards.

The Company adopted the provisions of Financial Standards Accounting Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes”, (“FIN 48”), an interpretation of FASB Statement No. 109 (“SFAS 109”), on January 1, 2007. As a result of the implementation of FIN 48, the Company recognized no material adjustment in its consolidated financial statements. As of the adoption date of January 1, 2007, the Company had $0.6 million of unrecognized

CARROLS RESTAURANT GROUP, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

(in thousands of dollars except share and per share amounts)

tax benefits. During the three months ended September 30, 2007 the statute of limitations affecting the taxing jurisdictions pertaining to $0.5 million of unrecognized tax benefits and $0.1 million of accrued interest expired. The Company recorded this tax benefit as a discrete tax item in the third quarter of 2007. At September 30, 2007 the Company has no remaining unrecognized tax benefits. The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. As of September 30, 2007, the Company had no accrued interest related to uncertain tax positions.

For the nine months ended September 30, 2007 the Company has recorded total discrete tax adjustments reducing income tax expense of $0.8 million.

The provision for income taxes for the three and nine months ended September 30, 2006 was derived using an estimated effective annual income tax rate for 2006 of 33.5%. There were no discrete tax items affecting the provision for income taxes in the three and nine months ended September 30, 2006.

The tax years 2004-2006 remain open to examination by the major taxing jurisdictions to which the Company is subject.

On July 12, 2007, the Michigan Business Tax (the “MBT Act”) was signed into law, which provides a comprehensive restructuring of Michigan’s principal business taxes effective January 1, 2008. The MBT Act replaces the Michigan Single Business Tax that is scheduled to expire at the end of 2007. The effect of the MBT Act did not materially impact the Company’s consolidated financial statements.

7. Other Liabilities, Long-Term

Other liabilities, long-term, at September 30, 2007 and December 31, 2006 consisted of the following:


	September 30,		December 31,
	2007		2006
Unearned purchase discounts	$	2,854	$	4,526
Accrued occupancy costs		9,476		8,683
Accrued workers’ compensation costs		4,650		4,595
Other		6,216		5,690

	$	23,196	$	23,494

In 2001, management decided to close seven Taco Cabana restaurants in the Phoenix, Arizona market and discontinue restaurant development underway in that market. At September 30, 2007 and December 31, 2006, the Company had $0.6 million and $0.7 million in lease liability reserves, respectively, for remaining locations that are included in accrued occupancy costs.

8. Postretirement Benefits

The Company provides postretirement medical and life insurance benefits covering substantially all Burger King administrative and restaurant management salaried employees. A December 31 measurement date is used for postretirement benefits.

The following summarizes the components of net periodic benefit cost:


	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2007		2006			2007		2006
Components of net periodic benefit cost:
Service cost	$	124	$	118		$	370	$	354
Interest cost		101		85			304		251
Amortization of gains and losses		24		21			72		63
Amortization of unrecognized prior service cost		1		(8	)		4		(22	)

Net periodic postretirement benefit cost	$	250	$	216		$	750	$	646

CARROLS RESTAURANT GROUP, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

(in thousands of dollars except share and per share amounts)

During the three and nine months ended September 30, 2007, the Company made contributions of $56 and $172 to its postretirement plan to pay current benefits. The Company expects to make additional contributions during 2007.

On November 1, 2007 the Company amended its postretirement medical and life insurance benefits covering substantially all Burger King administrative and restaurant management personnel. The amendment included an elimination of life insurance benefits for active employees who retire after December 31, 2007 and increases in retiree contributions for both current and future retirees effective January 1, 2008. These amendments will reduce postretirement benefit obligations and costs beginning in the fourth quarter of 2007.

9. Lease Financing Obligations

The Company entered into sale-leaseback transactions in various years involving certain restaurant properties that did not qualify for sale-leaseback accounting and as a result, have been classified as financing transactions under Statement of Financial Accounting Standards (“SFAS”) No. 98, “Accounting for Leases” (“SFAS 98”). Under the financing method, the assets remain on the Company’s consolidated balance sheet and proceeds received by the Company from these transactions are recorded as a financing liability. Payments under these leases are applied as payments of imputed interest and deemed principal on the underlying financing obligations.

During the second quarter of 2007, the Company exercised its right of first refusal under the leases for five restaurant properties previously accounted for as lease financing obligations and purchased these properties from the lessor. As a result, the Company reduced its lease financing obligations by $4.4 million. The Company also recorded a gain of $0.2 million as a reduction of interest expense which represented the net amount by which the lease financing obligations exceeded the purchase price of the restaurant properties acquired.

During the second and third quarters of 2006, the Company refinanced 14 restaurant properties previously accounted for as lease financing obligations and amended lease agreements for 34 restaurant properties to eliminate or otherwise cure the provisions that precluded the original sale-leaseback accounting. As a result of these transactions in 2006, the Company reduced its lease financing obligations by $52.8 million, reduced its assets under lease financing obligations by $36.2 million and recorded deferred gains of $18.3 million which are being amortized as a reduction to rent expense over the remaining term of the underlying leases, which is generally 20 years.

As a result of these transactions, rent expense in the nine months ended September 30, 2007 includes an additional $2.0 million of expense compared to the nine months ended September 30, 2006. Also as a result of these transactions, the nine months ended September 30, 2006 includes additional depreciation expense of $0.6 million and additional interest expense of $1.3 million and $2.6 million as compared to the nine months ended September 30, 2007. Interest expense associated with lease financing obligations, including settlement gains and losses, for the three months ended September 30, 2007 and 2006 was $1.4 million and $1.7 million, respectively and for the nine months ended September 30, 2007 and 2006 was $4.2 million and $8.9 million, respectively.

10. Other Income

In the first quarter of 2007, the Company recorded a gain of $0.3 million related to sale of one of its Taco Cabana restaurant properties. In the third quarter of 2007, the Company recorded a gain of $0.3 million related to the sale of one of its non-operating Burger King restaurant properties.

During the third quarter of 2006, the Company reduced its lease liability reserves by $0.3 million due to an increase in the Company’s estimates for future sublease income at such locations and also reduced collection reserves previously established for a $1.1 million note receivable related to the sale of leasehold improvements at two of the closed locations that were written off as part of the restructuring charge in 2001. This note was paid in full in the fourth quarter of 2006. The effect of these transactions is presented in other income in the Consolidated Statements of Operations.

11. Business Segment Information

CARROLS RESTAURANT GROUP, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

(in thousands of dollars except share and per share amounts)

King restaurants are all located in the United States, primarily in the Northeast, Southeast and Midwest. Pollo Tropical is a quick-casual restaurant chain featuring grilled marinated chicken and Caribbean style “made from scratch” side dishes. Pollo Tropical’s core markets are located in South and Central Florida. Taco Cabana is a quick-casual restaurant chain featuring fresh Mexican style food, including flame-grilled beef and chicken fajitas, quesadillas and other Tex-Mex dishes. Taco Cabana’s core markets are primarily located in Texas.

The accounting policies of each segment are the same as those described in the summary of significant accounting policies. The following table includes Segment EBITDA which is the measure of segment profit or loss reported to the chief operating decision maker for purposes of allocating resources to the segments and assessing their performance. Segment EBITDA is defined as earnings attributable to the applicable segment before interest, income taxes, depreciation and amortization, impairment losses, stock-based compensation expense and other income and expense.

The “Other” column includes corporate related items not allocated to reportable segments, including stock-based compensation expense. Other identifiable assets consist primarily of cash, certain other assets, corporate property and equipment, goodwill and deferred income taxes.

CARROLS RESTAURANT GROUP, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

(in thousands of dollars except share and per share amounts)


	Pollo		Taco		Burger
Three Months Ended	Tropical		Cabana		King		Other		Consolidated
September 30, 2007:
Total revenues	$	42,560	$	61,254	$	99,695	$	—	$	203,509
Cost of sales		13,697		18,532		26,637		—		58,866
Restaurant wages and related expenses		10,495		17,652		31,327		45		59,519
General and administrative expenses (1)		2,190		2,655		7,168		314		12,327
Depreciation and amortization		1,763		2,163		3,827		354		8,107
Segment EBITDA		7,776		7,348		9,197
Capital expenditures, including acquisitions		5,202		5,043		2,437		347		13,029

September 30, 2006:
Total revenues	$	38,239	$	58,062	$	93,296	$	—	$	189,597
Cost of sales		12,178		16,835		23,987		—		53,000
Restaurant wages and related expenses		9,869		16,493		28,685		—		55,047
General and administrative expenses (1)		2,049		2,749		7,043		—		11,841
Depreciation and amortization		1,256		2,517		4,297		327		8,397
Segment EBITDA		6,489		9,854		9,177
Capital expenditures, including acquisitions		5,047		4,795		1,771		322		11,935

Nine Months Ended
September 30, 2007:
Total revenues	$	126,846	$	180,222	$	285,093	$	—	$	592,161
Cost of sales		41,238		53,485		74,339		—		169,062
Restaurant wages and related expenses		31,460		51,526		90,922		121		174,029
General and administrative expenses (1)		7,226		8,256		22,349		947		38,778
Depreciation and amortization		4,927		6,337		11,428		993		23,685
Segment EBITDA		21,862		22,723		23,416
Capital expenditures, including acquisitions		18,442		13,086		7,388		1,840		40,756

September 30, 2006:
Total revenues	$	115,303	$	171,983	$	275,435	$	—	$	562,721
Cost of sales		37,151		49,860		71,288		—		158,299
Restaurant wages and related expenses		28,842		48,728		86,437		—		164,007
General and administrative expenses (1)		6,315		8,606		21,271		—		36,192
Depreciation and amortization		4,038		6,580		13,573		986		25,177
Segment EBITDA		21,792		25,669		26,345
Capital expenditures, including acquisitions		13,050		11,633		6,050		1,324		32,057

Identifiable Assets:
At September 30, 2007	$	54,897	$	77,383	$	149,628	$	180,846	$	462,754
At December 31, 2006		46,617		71,601		155,272		179,369		452,859

(1)

For the Pollo Tropical and Taco Cabana segments, such amounts include general and administrative expenses related directly to each segment. For the Burger King segment such amounts include general and administrative expenses related directly to the Burger King segment as well as expenses associated with administrative support to all of the Company’s segments including executive management, information systems and certain accounting, legal and other administrative functions.

CARROLS RESTAURANT GROUP, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

(in thousands of dollars except share and per share amounts)

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


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
		2007			2006			2007			2006
Segment EBITDA:
Pollo Tropical	$	7,776		$	6,489		$	21,862		$	21,792
Taco Cabana		7,348			9,854			22,723			25,669
Burger King		9,197			9,177			23,416			26,345

Subtotal		24,321			25,520			68,001			73,806
Less:
Depreciation and amortization		8,107			8,397			23,685			25,177
Impairment losses		1,810			588			1,879			832
Interest expense		7,690			10,216			23,647			34,616
Loss on extinguishment of debt		-			-			1,485			-
Provision for income taxes		1,795			2,580			5,349			4,828
Stock-based compensation expense		359			-			1,068			-
Other income		(303	)		(1,389	)		(650	)		(1,389	)

Net income	$	4,863		$	5,128		$	11,538		$	9,742

12. Commitments and Contingencies

On November 16, 1998, the Equal Employment Opportunity Commission (“EEOC”) filed suit in the United States District Court for the Northern District of New York (the “Court”), under Title VII of the Civil Rights Act of 1964, as amended, against Carrols. The complaint alleged that Carrols engaged in a pattern and practice of unlawful discrimination, harassment and retaliation against former and current female employees. The EEOC identified approximately 450 individuals (which was subsequently increased to 511 individuals) that it believed represented the class of claimants and was seeking monetary and injunctive relief from Carrols.

On April 20, 2005, the Court issued a decision and order granting Carrols’ Motion for Summary Judgment that Carrols filed in January 2004. Subject to possible appeal by the EEOC, the case is dismissed, however the Court noted that it was not ruling on the claims, if any, that individual employees might have against Carrols. The Company does not believe that any individual claim, if any, would have a material adverse impact on its consolidated financial statements.

On February 27, 2006, Carrols filed a motion for summary judgment to dismiss all but between four and 17 of the individual claims. On July 10, 2006, in its response to that motion, the EEOC has asserted that, notwithstanding the Court’s dismissal of the case as a class action, the EEOC may still maintain some kind of collective action on behalf of these claimants. Oral argument before the Court was held on October 4, 2006 and the Company is awaiting the Court’s decision on Carrols’ summary judgment motion. Although the Company believes that the EEOC’s continued class litigation argument is without merit, it is not possible to predict the outcome of the pending motion.

On November 30, 2002, four former hourly employees commenced a lawsuit against Carrols in the United States District Court for the Western District of New York entitled Dawn Seever, et al. v. Carrols Corporation. The lawsuit alleges, in substance, that Carrols violated certain minimum wage laws under the Federal Fair Labor Standards Act and related state laws by requiring employees to work without recording their time and by retaliating against those who complained. The plaintiffs seek damages, costs and injunctive relief. They also seek to notify, and eventually certify, a class consisting of current and former employees who, since 1998, have worked, or are working, for Carrols. As a result of the July 21, 2005 Status Conference, the parties agreed to withdraw Plaintiff’s Motions to Certify and for National Discovery, and Defendant’s Motion to Disqualify Counsel and related motions, to allow both sides limited additional discovery. Carrols has since filed a Motion for Summary Judgment as to the existing plaintiffs that the Court has under consideration. On January 19, 2007, plaintiffs re-filed the Motion to certify and for National Discovery. Carrols has opposed such Motions. Carrols has also moved to disqualify the Plaintiffs from representing the class and to strike the purported evidence presented in support of the motion to certify. The various motions are scheduled for hearing on November 19, 2007. It is too early to evaluate the likelihood of an unfavorable outcome or estimate the amount or range of potential loss, if any. Consequently, it is not possible to predict what adverse

CARROLS RESTAURANT GROUP, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

(in thousands of dollars except share and per share amounts)

impact, if any, this case could have on the Company’s consolidated financial statements. Carrols intends to continue to contest this case vigorously.

The Company is a party to various other litigation matters incidental to the conduct of business. The Company does not believe that the outcome of any of these other matters will have a material adverse effect on its consolidated financial statements.

13. Net Income Per Share

Basic net income per share is computed by dividing net income for the period by the weighted average number of common shares outstanding during the period. Diluted net income per share is computed by dividing net income for the period by the weighted average number of common shares outstanding plus the dilutive effect of outstanding stock options using the treasury stock method.

The computation of diluted net income per share excludes options to purchase 1,226,450 shares of common stock in the three months ended September 30, 2007 because the exercise price of these options was greater than the average market price of the common shares in the period and therefore, are antidilutive. In addition, options to purchase 1,232,950 shares of common stock are excluded from the computation of diluted net income per share in the nine months ended September 30, 2007 as they were antidilutive under the treasury stock method.

In connection with the Company’s initial public offering in 2006, the Company authorized an 11.288 for-one stock split on November 21, 2006 which became effective on December 8, 2006. Accordingly, basic and diluted shares for all periods presented have been calculated based on the average shares outstanding, as adjusted for the stock split.

The following table is a reconciliation of the income and share amounts used in the calculation of basic net income per share and diluted net income per share:


	Three months ended September 30,				Nine months ended September 30,
	2007		2006		2007		2006
Basic net income per share:
Net income	$	4,863	$	5,128	$	11,538	$	9,742
Weighted average common shares outstanding		21,550,827		15,887,186		21,550,827		15,892,329
Basic net income per share	$	0.23	$	0.32	$	0.54	$	0.61
Diluted net income per share:
Net income for diluted net income per share	$	4,863	$	5,128	$	11,538	$	9,742
Shares used in computing basic net income per share		21,550,827		15,887,186		21,550,827		15,892,329
Dilutive effect of restricted shares		4,193		—		8,697		—

Shares used in computing diluted net income per share		21,555,020		15,887,186		21,559,524		15,892,329

Diluted net income per share	$	0.23	$	0.32	$	0.54	$	0.61

14. Recent Accounting Developments

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). This statement defines fair value, establishes a framework for using fair value to measure assets and liabilities and expands disclosures about fair value measurements. The statement applies whenever other pronouncements require or permit assets or liabilities to be measured at fair value. SFAS 157 is effective for the Company’s fiscal year beginning January 1, 2008. The Company is evaluating the impact the adoption of SFAS 157 will have on the Company’s consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Liabilities – Including an amendment of FASB Statement No. 115” (“SFAS 159”). This statement permits entities to choose to measure many financial instruments and certain other items at fair value. SFAS 159 is effective for the Company’s fiscal year beginning January 1, 2008. The Company is currently evaluating the impact the adoption of SFAS 159 will have on its consolidated financial statements.

In May 2007, the FASB issued FASB Staff Position No. FIN 48-1, Definition of Settlement in FASB Interpretation No. 48 (the “FSP”). The FSP provides guidance about how an enterprise should determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits. Under the FSP, a tax position could be effectively settled if a taxing authority has completed all of its required or expected examination procedures, if the entity does not intend to appeal or litigate the result and it is remote that the taxing authority would examine or re-examine the tax position. Application of the FSP shall be upon the initial adoption date of FIN 48. The FSP did not have a material impact on the Company’s consolidated financial statements.

ITEM 1—INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

CARROLS CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands of dollars except share and per share amounts)

(Unaudited)


	September 30,			December 31,
	2007			2006
ASSETS
Current assets:
Cash and cash equivalents	$	7,622		$	3,939
Trade and other receivables		4,720			5,364
Inventories		4,939			4,677
Prepaid rent		2,755			4,130
Prepaid expenses and other current assets		6,990			5,367
Refundable income taxes		—			2,806
Deferred income taxes		4,549			4,539

Total current assets		31,575			30,822
Property and equipment, net		195,121			182,742
Franchise rights, net (Note 4)		80,856			83,268
Goodwill (Note 4)		124,934			124,934
Intangible assets, net (Note 4)		959			1,175
Franchise agreements, at cost less accumulated amortization of $5,562 and $5,431, respectively		5,683			5,793
Deferred income taxes		11,445			11,136
Other assets		12,181			12,989

Total assets	$	462,754		$	452,859

LIABILITIES AND STOCKHOLDER’S DEFICIT
Current liabilities:
Current portion of long-term debt (Note 5)	$	1,654		$	2,477
Accounts payable		21,068			17,860
Accrued interest		3,539			7,861
Accrued payroll, related taxes and benefits		17,670			18,445
Accrued income taxes payable		331			—
Accrued real estate taxes		4,037			4,102
Other liabilities		11,791			10,623

Total current liabilities		60,090			61,368
Long-term debt, net of current portion (Note 5)		300,881			297,432
Lease financing obligations (Note 9)		54,393			58,571
Deferred income—sale-leaseback of real estate		30,428			31,391
Accrued postretirement benefits (Note 8)		6,948			6,370
Other liabilities (Note 7)		23,159			23,462

Total liabilities		475,899			478,594
Commitments and contingencies (Note 12)
Stockholder’s deficit:
Common stock, par value $1; authorized 1,000 shares, issued and outstanding— 10 shares at both dates		—			—
Additional paid-in capital		(9,554	)		(10,601	)
Accumulated deficit		(2,590	)		(14,133	)
Accumulated other comprehensive loss		(1,001	)		(1,001	)

Total stockholder’s deficit		(13,145	)		(25,735	)

Total liabilities and stockholder’s deficit	$	462,754		$	452,859

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

CARROLS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006

(In thousands of dollars)

(Unaudited)


	Three months ended September 30,						Nine months ended September 30,
	2007			2006			2007			2006
Revenues:
Restaurant sales	$	203,181		$	189,254		$	591,164		$	561,719
Franchise royalty revenues and fees		328			343			997			1,002

Total revenues		203,509			189,597			592,161			562,721

Costs and expenses:
Cost of sales		58,866			53,000			169,062			158,299
Restaurant wages and related expenses (including stock- based compensation expense of $45, $0, $121 and $0, respectively)		59,519			55,047			174,029			164,007
Restaurant rent expense		11,101			9,004			32,687			27,183
Other restaurant operating expenses		30,276			28,577			86,230			82,466
Advertising expense		7,458			6,608			24,442			20,768
General and administrative (including stock-based compensation expense of $314, $0, $947 and $0, respectively)		12,325			11,839			38,773			36,187
Depreciation and amortization		8,107			8,397			23,685			25,177
Impairment losses (Note 3)		1,810			588			1,879			832
Other income (Note 10)		(303	)		(1,389	)		(650	)		(1,389	)

Total operating expenses		189,159			171,671			550,137			513,530

Income from operations		14,350			17,926			42,024			49,191
Interest expense		7,690			10,216			23,647			34,616
Loss on extinguishment of debt (Note 5)		—			—			1,485			—

Income before income taxes		6,660			7,710			16,892			14,575
Provision for income taxes (Note 6)		1,795			2,580			5,349			4,828

Net income	$	4,865		$	5,130		$	11,543		$	9,747

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

CARROLS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006

(In thousands of dollars)

(Unaudited)


	2007			2006
Cash flows provided from operating activities:
Net income	$	11,543		$	9,747
Adjustments to reconcile net income to net cash provided from operating activities:
Gain on disposals of property and equipment		(57	)		—
Stock-based compensation expense		1,068			—
Depreciation and amortization		23,685			25,177
Amortization of deferred financing costs		940			1,098
Amortization of unearned purchase discounts		(1,616	)		(1,616	)
Amortization of deferred gains from sale-leaseback transactions		(1,460	)		(897	)
Impairment losses		1,879			832
Gain on settlements of lease financing obligations		(163	)		(120	)
Accretion of interest on lease financing obligations		397			281
Deferred income taxes		(319	)		159
Loss on extinguishment of debt		1,485			—
Changes in other operating assets and liabilities		3,982			2,191

Net cash provided from operating activities		41,364			36,852

Cash flows used for investing activities:
Capital expenditures:
New restaurant development		(26,241	)		(20,370	)
Restaurant remodeling		(5,850	)		(4,885	)
Other restaurant capital expenditures		(6,825	)		(5,478	)
Corporate and restaurant information systems		(1,840	)		(1,324	)

Total capital expenditures		(40,756	)		(32,057	)
Properties purchased for sale-leaseback		(2,461	)		(2,663	)
Proceeds from sale-leaseback transactions		7,036			31,693
Proceeds from sales of other properties		1,623			—

Net cash used for investing activities		(34,558	)		(3,027	)

Cash flows used for financing activities:
Repayment of term loans under prior credit facility		(118,400	)		—
Borrowings on revolving credit facility		45,500			—
Repayments on revolving credit facility		(44,300	)		—
Proceeds from new senior credit facility		120,000			—
Scheduled principal payments on term loans		—			(1,650	)
Principal pre-payments on term loans		—			(23,200	)
Principal payments on capital leases		(262	)		(305	)
Expenses from initial public offering		(21	)		—
Financing costs associated with issuance of debt		(1,228	)		—
Settlement of lease financing obligations		(4,412	)		(15,215	)

Net cash used for financing activities		(3,123	)		(40,370	)

Net increase (decrease) in cash and cash equivalents		3,683			(6,545	)
Cash and cash equivalents, beginning of period		3,939			9,331

Cash and cash equivalents, end of period	$	7,622		$	2,786

Supplemental disclosures:
Interest paid on long-term debt	$	22,932		$	24,752
Interest paid on lease financing obligations	$	3,700		$	8,665
Increase (decrease) in accruals for capital expenditures	$	(348	)	$	601
Income taxes paid, net	$	3,064		$	2,753
Non-cash reduction of assets under lease financing obligation due to lease amendments	$	—		$	24,707
Non-cash reduction of lease financing obligations due to lease amendments	$	—		$	37,544
Capital lease obligations incurred	$	88		$	—

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

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands of dollars, except share amounts)

1. Basis of Presentation

Basis of Consolidation. The unaudited consolidated financial statements presented herein include the accounts of Carrols Corporation and its subsidiaries (“the Company”). The Company is a wholly-owned subsidiary of Carrols Restaurant Group, Inc. (“Carrols Restaurant Group”). All intercompany transactions have been eliminated in consolidation.

The difference between the consolidated financial statements of Carrols Corporation and Carrols Restaurant Group is primarily due to additional rent expense of approximately $6 per year for Carrols Restaurant Group and the composition of stockholder’s deficit.

Earnings Per Share Presentation. The guidance of SFAS No. 128, “Earnings Per Share,” requires presentation of earnings per share by all entities that have issued common stock or potential common stock if those securities trade in a public market either on a stock exchange (domestic or foreign) or in the over-the-counter market. The Company’s common stock is not publicly traded and therefore, earnings per share amounts are not presented.

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

(in thousands of dollars, except share amounts)

2. Stock-Based Compensation

Carrols Restaurant Group adopted an incentive stock plan in 2006 (the “2006 Plan”) under which incentive stock options, non-qualified stock options and restricted shares may be granted to employees and non-employee directors. In December 2006, Carrols Restaurant Group granted incentive stock options, non-qualified stock options and restricted shares under the 2006 Plan. The stock options granted generally vest at 20% per year and expire seven years from the date of grant. Restricted shares granted to employees generally vest 33% per year for three years and restricted shares granted to non-employee directors generally vest at 20% per year.

Stock Options

A summary of all option activity for the nine months ended September 30, 2007 was as follows:


	2006 Plan
	Number of Options		Weighted Average Exercise Price		Average Remaining Contractual Life	Aggregate Intrinsic Value (in thousands) (1)
Options outstanding at January 1, 2007	1,241,750		$	14.30
Options granted	10,500			15.81
Options forfeited	(25,800	)		14.30

Options outstanding at September 30, 2007	1,226,450		$	14.31	6.26	$	—

Expected to vest at September 30, 2007	1,210,360		$	14.31	6.26	$	—

Options exercisable at September 30, 2007	—		$	—	—	$	—

(1)

The aggregate intrinsic value was calculated using the difference between the market price of Carrols Restaurant Group’s common stock at September 30, 2007 and the exercise price for only those awards that have an exercise price that is less than the market price of the Carrols Restaurant Group’s common stock at September 30.

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

(in thousands of dollars, except share amounts)

Restricted Shares

The restricted stock activity for the nine months ended September 30, 2007 was as follows:


	Shares		Weighted Average Grant Date Fair Value
Nonvested at January 1, 2007	75,800		$	13.00
Shares granted	8,200		$	14.58
Shares forfeited	(5,700	)	$	13.05

Nonvested at September 30, 2007	78,300		$	13.16

The fair value of restricted shares granted is determined based on the Company’s closing stock price on the date of grant.

3. Impairment of Long-Lived Assets

For the three and nine months ended September 30, 2007 and 2006, the Company recorded impairment losses on long-lived assets for its segments as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2007		2006		2007		2006
Burger King	$	54	$	—	$	68	$	224
Pollo Tropical		1,657		—		1,657		—
Taco Cabana		99		588		154		608

	$	1,810	$	588	$	1,879	$	832

4. Goodwill, Franchise Rights and Intangible Assets


	Pollo Tropical		Taco Cabana		Burger King		Total
Goodwill at September 30, 2007 and December 31, 2006	$	56,307	$	67,177	$	1,450	$	124,934

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

(in thousands of dollars, except share amounts)


	September 30, 2007				December 31, 2006
	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Intangible assets	$	1,610	$	651	$	1,610	$	435

5. Long-term Debt

Long-term debt at September 30, 2007 and December 31, 2006 consisted of the following:


	September 30, 2007			December 31, 2006
Collateralized:
Revolving Credit facility	$	1,200		$	—
Senior Credit Facility-Term loan B facility		—			118,400
Senior Credit Facility-Term loan A facility		120,000
Unsecured:
9% Senior Subordinated Notes		180,000			180,000
Capital leases		1,335			1,509

		302,535			299,909
Less: current portion		(1,654	)		(2,477	)

	$	300,881		$	297,432

On March 9, 2007, the Company terminated its senior credit facility and entered into a new senior credit facility with a syndicate of lenders. The Company’s new senior credit facility totals approximately $185 million, consisting of $120 million principal amount of term loan A borrowings maturing on March 8, 2013 (or earlier on September 30, 2012 if the Company’s 9% Senior Subordinated Notes due 2013 are not refinanced by June 30, 2012) and a $65.0 million revolving facility (including a sub limit of up to $25.0 million for letters of credit and up to $5.0 million for swingline loans), maturing on March 8, 2012. The term loan A borrowings and an additional $4.3 million of revolver borrowings from this facility were used to repay all outstanding borrowings and other obligations under the Company’s prior senior credit facility and to pay certain fees and expenses incurred in connection with the new senior credit facility. The Company also recorded a $1.5 million loss on extinguishment of debt in the nine months ended September 30, 2007 for the write-off of deferred financing costs related to the prior senior credit facility.

Both term loan and revolving credit borrowings under the new senior credit facility bear interest at a per annum rate, at the Company’s option, of either:

1) the applicable margin ranging from 0% to 0.25% based on the Company’s senior leverage ratio (as defined in the new senior credit facility) plus the greater of (i) the prime rate or (ii) the federal funds rate for that day plus 0.5%; or

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

(in thousands of dollars, except share amounts)

2) Adjusted LIBOR plus the applicable margin percentage in effect ranging from 1.0% to 1.5% based on the Company’s senior leverage ratio.

Term loan A borrowings shall be due and payable in quarterly installments, beginning on June 30, 2008 as follows:

four quarterly installments of $1.5 million beginning on June 30, 2008;

eight quarterly installments of $3.0 million beginning on June 30, 2009;

four quarterly installments of $4.5 million beginning on June 30, 2011; and

four quarterly installments of $18.0 million beginning on June 30, 2012.

Under the new senior credit facility, the Company is also required to make mandatory prepayments of principal on term loan A facility borrowings (a) annually in an amount up to 50% of Excess Cash Flow depending upon the Company’s Total Leverage Ratio (as such terms are defined in the new senior credit facility), (b) in the event of certain dispositions of assets (all subject to certain exceptions) and insurance proceeds, in an amount equal to 100% of the net proceeds received by the Company there from, and (c) in an amount equal to 100% of the net proceeds from any subsequent issuance of debt.

In general, the Company’s obligations under the new senior credit facility are guaranteed by the Company and all of the Company’s material subsidiaries and are collateralized by a pledge of the Company’s common stock and the stock of each of the Company’s material subsidiaries. The new senior credit facility contains certain covenants, including, without limitation, those limiting the Company’s ability to incur indebtedness, incur liens, sell or acquire assets or businesses, change the nature of its business, engage in transactions with related parties, make certain investments or pay dividends. In addition, the Company is required to meet certain financial ratios, including fixed charge coverage, senior leverage, and total leverage ratios (all as defined under the new senior credit facility). The Company was in compliance with the covenants under its new senior credit facility as of September 30, 2007.

On December 15, 2004, the Company issued $180 million of 9% Senior Subordinated Notes due 2013, which are referred to herein as the “senior subordinated notes.” Restrictive covenants under the senior subordinated notes include limitations with respect to the Carrols’ ability to issue additional debt, incur liens, sell or acquire assets or businesses, pay dividends and make certain investments. At both September 30, 2007 and December 31, 2006, $180.0 million principal amount of the senior subordinated notes was outstanding.

6. Income Taxes

The income tax provision for the three and nine months ended September 30, 2007 and 2006 was comprised of the following:


	Three Months Ended September 30,					Nine Months Ended September 30,
	2007			2006		2007			2006
Current	$	1,904		$	1,072	$	5,668		$	4,669
Deferred		(109	)		1,508		(319	)		159

	$	1,795		$	2,580	$	5,349		$	4,828

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

(in thousands of dollars, except share amounts)

January 1, 2007. As a result of the implementation of FIN 48, the Company recognized no material adjustment in its consolidated financial statements. As of the adoption date of January 1, 2007, the Company had $0.6 million of unrecognized tax benefits. During the three months ended September 30, 2007 the statute of limitations affecting the taxing jurisdictions pertaining to $0.5 million of unrecognized tax benefits and $0.1 million of accrued interest expired. The Company recorded this tax benefit as a discrete tax item in the third quarter of 2007. At September 30, 2007 the Company has no remaining unrecognized tax benefits. The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. As of September 30, 2007, the Company had no accrued interest related to uncertain tax positions.

For the nine months ended September 30, 2007 the Company has recorded total discrete tax adjustments reducing income tax expense of $0.8 million.

The tax years 2004-2006 remain open to examination by the major taxing jurisdictions to which the Company is subject.

7. Other Liabilities, Long-Term

Other liabilities, long-term, at September 30, 2007 and December 31, 2006 consisted of the following:


	September 30, 2007		December 31, 2006
Unearned purchase discounts	$	2,854	$	4,526
Accrued occupancy costs		9,476		8,683
Accrued workers’ compensation costs		4,650		4,595
Other		6,179		5,658

	$	23,159	$	23,462

In 2001, management decided to close seven Taco Cabana restaurants in the Phoenix, Arizona market and discontinue restaurant development underway in that market. At September 30, 2007 and December 31, 2006, the Company had $0.6 million and $0.7 million in lease liability reserves, respectively, for the remaining locations that are included in accrued occupancy costs.

8. Postretirement Benefits

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

(in thousands of dollars, except share amounts)

The following summarizes the components of net periodic benefit cost:


	Three Months Ended September 30,					Nine Months Ended September 30,
	2007		2006			2007		2006
Components of net periodic benefit cost:
Service cost	$	124	$	118		$	370	$	354
Interest cost		101		85			304		251
Amortization of gains and losses		24		21			72		63
Amortization of unrecognized prior service cost		1		(8	)		4		(22	)

Net periodic postretirement benefit cost	$	250	$	216		$	750	$	646

9. Lease Financing Obligations

The Company entered into sale-leaseback transactions in various years involving certain restaurant properties that did not qualify for sale-leaseback accounting and as a result, have been classified as financing transactions under SFAS No. 98, “Accounting for Leases” (“SFAS 98”). Under the financing method, the assets remain on the Company’s consolidated balance sheet and proceeds received by the Company from these transactions are recorded as a financing liability. Payments under these leases are applied as payments of imputed interest and deemed principal on the underlying financing obligations.

As a result of these transactions, rent expense in the nine months ended September 30, 2007 includes an additional $2.0 million of expense compared to nine months ended September 30, 2006. Also as a result of these transactions, the nine months ended September 30, 2006 includes additional depreciation expense of $0.6 million and additional interest expense of $1.3 million and $2.6 million as compared to the nine months ended September 30, 2007. Interest expense associated with lease financing obligations, including settlement gains and losses, for the three months ended September 30, 2007 and 2006 was $1.4 million and $1.7 million, respectively and for the nine months ended September 30, 2007 and 2006 was $4.2 million and $8.9 million, respectively.

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

(in thousands of dollars, except share amounts)

10. Other Income

11. Business Segment Information

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

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

(in thousands of dollars, except share amounts)


Three Months Ended	Pollo Tropical		Taco Cabana		Burger King		Other		Consolidated
September 30, 2007:
Total revenues	$	42,560	$	61,254	$	99,695	$	—	$	203,509
Cost of sales		13,697		18,532		26,637		—		58,866
Restaurant wages and related expenses		10,495		17,652		31,327		45		59,519
General and administrative expenses (1)		2,188		2,655		7,168		314		12,325
Depreciation and amortization		1,763		2,163		3,827		354		8,107
Segment EBITDA		7,778		7,348		9,197
Capital expenditures, including acquisitions		5,202		5,043		2,437		347		13,029
September 30, 2006:
Total revenues	$	38,239	$	58,062	$	93,296	$	—	$	189,597
Cost of sales		12,178		16,835		23,987		—		53,000
Restaurant wages and related expenses		9,869		16,493		28,685		—		55,047
General and administrative expenses (1)		2,047		2,749		7,043		—		11,839
Depreciation and amortization		1,256		2,517		4,297		327		8,397
Segment EBITDA		6,491		9,854		9,177
Capital expenditures, including acquisitions		5,047		4,795		1,771		322		11,935

Nine Months Ended
September 30, 2007:
Total revenues	$	126,846	$	180,222	$	285,093	$	—	$	592,161
Cost of sales		41,238		53,485		74,339		—		169,062
Restaurant wages and related expenses		31,460		51,526		90,922		121		174,029
General and administrative expenses (1)		7,221		8,256		22,349		947		38,773
Depreciation and amortization		4,927		6,337		11,428		993		23,685
Segment EBITDA		21,867		22,723		23,416
Capital expenditures, including acquisitions		18,442		13,086		7,388		1,840		40,756
September 30, 2006:
Total revenues	$	115,303	$	171,983	$	275,435	$	—	$	562,721
Cost of sales		37,151		49,860		71,288		—		158,299
Restaurant wages and related expenses		28,842		48,728		86,437		—		164,007
General and administrative expenses (1)		6,310		8,606		21,271		—		36,187
Depreciation and amortization		4,038		6,580		13,573		986		25,177
Segment EBITDA		21,797		25,669		26,345
Capital expenditures, including acquisitions		13,050		11,633		6,050		1,324		32,057
Identifiable Assets:
At September 30, 2007	$	54,897	$	77,383	$	149,628	$	180,846	$	462,754
At December 31, 2006		46,617		71,601		155,272		179,369		452,859

(1)

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

(in thousands of dollars, except share amounts)

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


	Six Months Ended September 30,						Nine Months Ended September 30,
	2007			2006			2007			2006
Segment EBITDA:
Pollo Tropical	$	7,778		$	6,491		$	21,867		$	21,797
Taco Cabana		7,348			9,854			22,723			25,669
Burger King		9,197			9,177			23,416			26,345

Subtotal		24,323			25,522			68,006			73,811
Less:
Depreciation and amortization		8,107			8,397			23,685			25,177
Impairment losses		1,810			588			1,879			832
Interest expense		7,690			10,216			23,647			34,616
Loss on extinguishment of debt		—			—			1,485			—
Provision for income taxes		1,795			2,580			5,349			4,828
Stock-based compensation expense		359			—			1,068			—
Other income		(303	)		(1,389	)		(650	)		(1,389	)

Net income	$	4,865		$	5,130		$	11,543		$	9,747

12. Commitments and Contingencies

On November 16, 1998, the Equal Employment Opportunity Commission (“EEOC”) filed suit in the United States District Court for the Northern District of New York (the “Court”), under Title VII of the Civil Rights Act of 1964, as amended, against the Company. The complaint alleged that the Company engaged in a pattern and practice of unlawful discrimination, harassment and retaliation against former and current female employees. The EEOC identified approximately 450 individuals (which were subsequently increased to 511 individuals) that it believed represented the class of claimants and was seeking monetary and injunctive relief from the Company.

On April 20, 2005, the Court issued a decision and order granting the Company’s Motion for Summary Judgment that the Company filed in January 2004. Subject to possible appeal by the EEOC, the case is dismissed, however the Court noted that it was not ruling on the claims, if any, that individual employees might have against the Company. The Company does not believe that any individual claim, if any, would have a material adverse impact on its consolidated financial statements.

On February 27, 2006, the Company filed a motion for summary judgment to dismiss all but between four and 17 of the individual claims. On July 10, 2006, in its response to that motion, the EEOC has asserted that, notwithstanding the Court’s dismissal of the case as a class action, the EEOC may still maintain some kind of collective action on behalf of these claimants. Oral argument before the Court was held on October 4, 2006 and the Company is awaiting the Court’s decision on the Company’s summary judgment motion. Although the Company believes that the EEOC’s continued class litigation argument is without merit, it is not possible to predict the outcome of the pending motion.

On November 30, 2002, four former hourly employees commenced a lawsuit against the Company in the United States District Court for the Western District of New York entitled Dawn Seever, et al. v. Carrols Corporation. The lawsuit alleges, in substance, that the Company violated certain minimum wage laws under the Federal Fair Labor Standards Act and related state laws by requiring employees to work without recording their time and by retaliating against those who complained. The plaintiffs seek damages, costs and injunctive relief. They also seek to notify, and eventually certify, a class consisting of current and former employees who, since 1998, have worked, or are working, for the Company. As a result of the July 21, 2005 Status Conference, the parties agreed to withdraw Plaintiff’s Motions to Certify and for National Discovery, and Defendant’s Motion to Disqualify Counsel and related motions, to allow both sides limited additional discovery. The Company has since filed a Motion for Summary Judgment as to the existing plaintiffs that the Court has under consideration. On January 19, 2007, plaintiffs re-filed the Motion to certify and for National Discovery. The Company has opposed such Motions. The Company has also moved to disqualify the Plaintiffs from representing the class and to strike the purported evidence presented in support of the motion to certify. The various motions are scheduled for hearing on November 19, 2007. It is too early to evaluate the likelihood of an unfavorable outcome or estimate the amount or

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

(in thousands of dollars, except share amounts)

range of potential loss, if any. Consequently, it is not possible to predict what adverse impact, if any, this case could have on the Company’s consolidated financial statements. The Company intends to continue to contest this case vigorously.

13. Recent Accounting Developments

14. Guarantor Financial Statements

The Company’s obligations under the senior subordinated notes are jointly and severally guaranteed in full on an unsecured senior subordinated basis by certain of the Company’s subsidiaries (“Guarantor Subsidiaries”), all of which are directly or indirectly wholly-owned by the Company. These subsidiaries are:

Cabana Beverages, Inc.

Cabana Bevco LLC

Carrols Realty Holdings Corp.

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.

TC Bevco LLC

T.C. Management, Inc.

TC Lease Holdings III, V and VI, Inc.

Get Real, Inc.

Texas Taco Cabana, L.P.

TPAQ Holding Corporation

The following supplemental financial information sets forth on a consolidating basis, balance sheets as of September 30, 2007 and December 31, 2006 for the Parent Company Only, Guarantor Subsidiaries and for the Company and the related statements of operations and cash flows for the three and nine months ended September 30, 2007 and 2006.

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

(in thousands of dollars, except share amounts)

For certain of the Company’s sale-leaseback transactions, the Parent Company 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 if they were accounted for as financing transactions of the Guarantor Subsidiaries. These adjustments are eliminated in consolidation.

For purposes of the guarantor financial statements, the Company and its subsidiaries determine the applicable tax provision for each entity generally using the separate return method. Under this method, current and deferred taxes are allocated to each reporting entity as if it were to file a separate tax return. The rules followed by the reporting entity in computing its tax obligation or refund, including the effects of the alternative minimum tax, would be the same as those followed in filing a separate return with the Internal Revenue Service. However, for purposes of evaluating an entity’s ability to realize its tax attributes, the Company assesses whether it is more likely than not that those assets will be realized at the consolidated level. Any differences in the total of the income tax provision (benefit) for the Parent Company only and the Guarantor Subsidiaries, as calculated on the separate return method and the consolidated income tax provision (benefit) are eliminated in consolidation.

The Company provides some administrative support to its subsidiaries related to executive management, information systems and certain accounting, legal and other administrative functions. For purposes of the guarantor financial statements, the Company allocates such corporate costs on a specific identification basis, where applicable, or based on revenues or the number of restaurants for each subsidiary. Management believes that these allocations are reasonable based on the nature of costs incurred.

CONSOLIDATING BALANCE SHEET

September 30, 2007

(In thousands of dollars)

(Unaudited)


	Parent Company Only			Guarantor Subsidiaries			Eliminations			Consolidated Total
ASSETS
Current assets:
Cash and cash equivalents	$	5,176		$	2,446		$	—		$	7,622
Trade and other receivables		1,217			3,503			—			4,720
Inventories		2,993			1,946			—			4,939
Prepaid rent		1,028			1,727			—			2,755
Prepaid expenses and other current assets		2,939			4,051			—			6,990
Deferred income taxes		2,655			1,894			—			4,549

Total current assets		16,008			15,567			—			31,575
Property and equipment, net		61,933			187,690			(54,502	)		195,121
Franchise rights, net		80,856			—			—			80,856
Goodwill		1,450			123,484			—			124,934
Intangible assets, net		—			959			—			959
Franchise agreements, net		5,683			—			—			5,683
Intercompany receivable (payable)		159,093			(159,650	)		557			—
Investment in subsidiaries		37,204						(37,204	)		—
Deferred income taxes		5,420			6,995			(970	)		11,445
Other assets		7,573			6,357			(1,749	)		12,181

Total assets	$	375,220		$	181,402		$	(93,868	)	$	462,754

LIABILITIES AND STOCKHOLDER’S EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt	$	1,589		$	65		$	—		$	1,654
Accounts payable		10,410			10,658			—			21,068
Accrued interest		3,539			—			—			3,539
Accrued payroll, related taxes and benefits		10,235			7,435			—			17,670
Accrued income taxes payable		331			—						331
Accrued real estate taxes		245			3,792			—			4,037
Other liabilities		8,524			3,267			—			11,791

Total current liabilities		34,873			25,217			—			60,090
Long-term debt, net of current portion		299,833			1,048			—			300,881
Lease financing obligations		14,892			107,929			(68,428	)		54,393
Deferred income—sale-leaseback of real estate		16,590			5,725			8,113			30,428
Accrued postretirement benefits		6,948			—			—			6,948
Other liabilities		15,229			7,519			411			23,159

Total liabilities		388,365			147,438			(59,904	)		475,899
Commitments and contingencies
Stockholder’s equity (deficit)		(13,145	)		33,964			(33,964	)		(13,145	)

Total liabilities and stockholder’s equity (deficit)	$	375,220		$	181,402		$	(93,868	)	$	462,754

CONSOLIDATING BALANCE SHEET

December 31, 2006

(In thousands of dollars)

(Unaudited)


	Parent Company Only			Guarantor Subsidiaries			Eliminations			Consolidated Total
ASSETS
Current assets:
Cash and cash equivalents	$	1,182		$	2,757		$	—		$	3,939
Trade and other receivables		783			4,581			—			5,364
Inventories		2,997			1,680			—			4,677
Prepaid rent		2,203			1,927			—			4,130
Prepaid expenses and other current assets		1,920			3,447			—			5,367
Refundable income taxes		2,806			—			—			2,806
Deferred income taxes		2,653			1,886			—			4,539

Total current assets		14,544			16,278			—			30,822
Property and equipment, net		62,978			171,369			(51,605	)		182,742
Franchise rights, net		83,268			—			—			83,268
Goodwill		1,450			123,484			—			124,934
Intangible assets, net		—			1,175			—			1,175
Franchise agreements, net		5,793			—			—			5,793
Intercompany receivable (payable)		151,907			(152,204	)		297			—
Investment in subsidiaries		35,396			—			(35,396	)		—
Deferred income taxes		5,215			6,619			(698	)		11,136
Other assets		8,703			6,008			(1,722	)		12,989

Total assets	$	369,254		$	172,729		$	(89,124	)	$	452,859

LIABILITIES AND STOCKHOLDER’S EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt	$	2,295		$	182		$	—		$	2,477
Accounts payable		7,783			10,077			—			17,860
Accrued interest		7,861			—			—			7,861
Accrued payroll, related taxes and benefits		11,034			7,411			—			18,445
Accrued real estate taxes		1,754			2,348			—			4,102
Other liabilities		7,123			3,500			—			10,623

Total current liabilities		37,850			23,518			—			61,368
Long-term debt, net of current portion		296,397			1,035						297,432
Lease financing obligations		19,419			103,060			(63,908	)		58,571
Deferred income—sale-leaseback of real estate		18,548			4,812			8,031			31,391
Accrued postretirement benefits		6,370			—			—			6,370
Other liabilities		16,405			6,799			258			23,462

Total liabilities		394,989			139,224			(55,619	)		478,594
Commitments and contingencies
Stockholder’s equity (deficit)		(25,735	)		33,505			(33,505	)		(25,735	)

Total liabilities and stockholder’s equity (deficit)	$	369,254		$	172,729		$	(89,124	)	$	452,859

CONSOLIDATING STATEMENT OF OPERATIONS

Three Months Ended September 30, 2007

(In thousands of dollars)

(Unaudited)


	Parent Company Only			Guarantor Subsidiaries		Eliminations			Consolidated Total
Revenues:
Restaurant sales	$	99,695		$	103,486	$	—		$	203,181
Franchise royalty revenues and fees		—			328		—			328

Total revenues		99,695			103,814		—			203,509

Costs and expenses:
Cost of sales		26,637			32,229		—			58,866
Restaurant wages and related expenses (including stock-based compensation expense of $45)		31,374			28,145		—			59,519
Restaurant rent expense		5,951			3,841		1,309			11,101
Other restaurant operating expenses		15,105			15,171		—			30,276
Advertising expense		4,310			3,148		—			7,458
General and administrative (including stock based compensation expense of $314)		6,890			5,435		—			12,325
Depreciation and amortization		4,037			4,379		(309	)		8,107
Impairment losses		54			1,756		—			1,810
Other income		(303	)		—		—			(303	)

Total operating expenses		94,055			94,104		1,000			189,159

Income from operations		5,640			9,710		(1,000	)		14,350
Interest expense		6,632			2,515		(1,457	)		7,690
Intercompany interest allocations		(4,557	)		4,557		—			—

Income before income taxes		3,565			2,638		457			6,660
Provision for income taxes		502			1,067		226			1,795
Equity income from subsidiaries		1,802			—		(1,802	)		—

Net income	$	4,865		$	1,571	$	(1,571	)	$	4,865

CONSOLIDATING STATEMENT OF OPERATIONS

Three Months Ended September 30, 2006

(In thousands of dollars)

(Unaudited)


	Parent Company Only			Guarantor Subsidiaries			Eliminations			Consolidated Total
Revenues:
Restaurant sales	$	93,296		$	95,958		$	—		$	189,254
Franchise royalty revenues and fees		—			343			—			343

Total revenues		93,296			96,301			—			189,597

Costs and expenses:
Cost of sales		23,987			29,013			—			53,000
Restaurant wages and related expenses		28,521			26,526			—			55,047
Restaurant rent expense		5,781			3,223			—			9,004
Other restaurant operating expenses		14,606			12,735			1,236			28,577
Advertising expense		4,017			2,591			—			6,608
General and administrative		6,463			5,376			—			11,839
Depreciation and amortization		4,452			4,247			(302	)		8,397
Impairment losses		—			588			—			588
Other income		—			(1,389	)					(1,389	)

Total operating expenses		87,827			82,910			934			171,671

Income from operations		5,469			13,391			(934	)		17,926
Interest expense		8,936			2,505			(1,225	)		10,216
Intercompany interest allocations		(4,557	)		4,557			—			—

Income before income taxes		1,090			6,329			291			7,710
Provision for income taxes		480			2,207			(107	)		2,580
Equity income from subsidiaries		4,520			—			(4,520	)		—

Net income	$	5,130		$	4,122		$	(4,122	)	$	5,130

CONSOLIDATING STATEMENT OF OPERATIONS

Nine months Ended September 30, 2007

(In thousands of dollars)

(Unaudited)


	Parent Company Only			Guarantor Subsidiaries			Eliminations			Consolidated Total
Revenues:
Restaurant sales	$	285,093		$	306,071		$	—		$	591,164
Franchise royalty revenues and fees		—			997			—			997

Total revenues		285,093			307,068			—			592,161

Costs and expenses:
Cost of sales		74,339			94,723			—			169,062
Restaurant wages and related expenses (including stock-based compensation expense of $121)		90,994			83,035			—			174,029
Restaurant rent expense		17,732			11,050			3,905			32,687
Other restaurant operating expenses		43,415			42,815			—			86,230
Advertising expense		12,920			11,522			—			24,442
General and administrative (including stock based compensation expense of $947)		20,474			18,299			—			38,773
Depreciation and amortization		11,981			12,626			(922	)		23,685
Impairment loss		68			1,811			—			1,879
Other income		(303	)		(347	)		—			(650	)

Total operating expenses		271,620			275,534			2,983			550,137

Income from operations		13,473			31,534			(2,983	)		42,024
Interest expense		20,449			7,542			(4,344	)		23,647
Loss on extinguishment of debt		1,485			—			—			1,485
Intercompany interest allocations		(13,669	)		13,669			—			—

Income before income taxes		5,208			10,323			1,361			16,892
Provision for income taxes		1,010			3,826			513			5,349
Equity income from subsidiaries		7,345			—			(7,345	)		—

Net income	$	11,543		$	6,497		$	(6,497	)	$	11,543

CONSOLIDATING STATEMENT OF OPERATIONS

Nine months Ended September 30, 2006

(In thousands of dollars)

(Unaudited)


	Parent Company Only			Guarantor Subsidiaries			Eliminations			Consolidated Total
Revenues:
Restaurant sales	$	275,435		$	286,284		$	—		$	561,719
Franchise royalty revenues and fees		—			1,002			—			1,002

Total revenues		275,435			287,286			—			562,721

Costs and expenses:
Cost of sales		71,288			87,011			—			158,299
Restaurant wages and related expenses		86,044			77,963			—			164,007
Restaurant rent expense		16,329			9,522			1,332			27,183
Other restaurant operating expenses		42,089			39,141			1,236			82,466
Advertising expense		11,676			9,092			—			20,768
General and administrative		19,451			16,736			—			36,187
Depreciation and amortization		14,057			11,706			(586	)		25,177
Impairment losses		224			608			—			832
Other income		—			(1,389	)					(1,389	)

Total operating expenses		261,158			250,390			1,982			513,530

Income from operations		14,277			36,896			(1,982	)		49,191
Interest expense		29,333			7,993			(2,710	)		34,616
Intercompany interest allocations		(13,669	)		13,669			—			—

Income (loss) before income taxes		(1,387	)		15,234			728			14,575
Provision (benefit) for income taxes		(496	)		5,336			(12	)		4,828
Equity income from subsidiaries		10,638			—			(10,638	)		—

Net income	$	9,747		$	9,898		$	(9,898	)	$	9,747

CONSOLIDATING STATEMENT OF CASH FLOWS

Nine months Ended September 30, 2007

(In thousands of dollars)

(Unaudited)


	Parent Company Only			Guarantor Subsidiaries			Eliminations			Consolidated Total
Cash flows provided from operating activities:
Net income	$	11,543		$	6,497		$	(6,497	)	$	11,543
Adjustments to reconcile net income to net cash provided from operating activities:
Gain on disposals of property and equipment		(122	)		65			—			(57	)
Stock-based compensation expense		794			274			—			1,068
Depreciation and amortization		11,981			12,626			(922	)		23,685
Amortization of deferred financing costs		898			108			(66	)		940
Amortization of unearned purchase discounts		(1,616	)		—			—			(1,616	)
Amortization of deferred gains from sale-leaseback transactions		(889	)		(267	)		(304	)		(1,460	)
Impairment losses		68			1,811			—			1,879
Gain on settlements of lease finanacing obligations		(163	)		—			—			(163	)
Accretion of interest on lease financing obligations		46			351			—			397
Deferred income taxes		(208	)		(234	)		123			(319	)
Loss on extinguishment of debt		1,485			—			—			1,485
Changes in other operating assets and liabilities		(8,441	)		4,757			7,666			3,982

Net cash provided from operating activities		15,376			25,988			—			41,364

Cash flows used for investing activities:
Capital expenditures:
New restaurant development		(878	)		(25,363	)		—			(26,241	)
Restaurant remodeling		(3,615	)		(2,235	)		—			(5,850	)
Other restaurant capital expenditures		(2,895	)		(3,930	)		—			(6,825	)
Corporate and restaurant information systems		(1,707	)		(133	)		—			(1,840	)

Total capital expenditures		(9,095	)		(31,661	)		—			(40,756	)
Properties purchased for sale-leaseback		—			(2,461	)		—			(2,461	)
Proceeds from sale-leaseback transactions		—			2,755			4,281			7,036
Proceeds from sales of other properties		644			979			—			1,623

Net cash used for investing activities		(8,451	)		(30,388	)		4,281			(34,558	)

Cash flows provided from (used for) financing activities:
Repayment of term loans under prior credit facility		(118,400	)		—			—			(118,400	)
Borrowings on revolving credit facility		45,500			—			—			45,500
Repayments on revolving credit facility		(44,300	)		—			—			(44,300	)
Proceeds from new senior credit facility		120,000			—			—			120,000
Principal payments on capital leases		(70	)		(192	)		—			(262	)
Expenses from initial public offering		(21	)		—			—			(21	)
Financing costs associated with issuance of debt		(1,228	)		(137	)		137			(1,228	)
Proceeds from lease financing obligations		—			4,418			(4,418	)		—
Settlement of lease financing obligations		(4,412	)		—			—			(4,412	)

Net cash provided from (used for) financing activities		(2,931	)		4,089			(4,281	)		(3,123	)

Net increase (decrease) in cash and cash equivalents		3,994			(311	)		—			3,683
Cash and cash equivalents, beginning of period		1,182			2,757			—			3,939

Cash and cash equivalents, end of period	$	5,176		$	2,446		$	—		$	7,622

CONSOLIDATING STATEMENT OF CASH FLOWS

Nine months Ended September 30, 2006

(In thousands of dollars)

(Unaudited)


	Parent Company Only			Guarantor Subsidiaries			Eliminations			Consolidated Total
Cash flows provided from operating activities:
Net income	$	9,747		$	9,898		$	(9,898	)	$	9,747
Adjustments to reconcile net income to net cash provided from operating activities:
Depreciation and amortization		14,057			11,706			(586	)		25,177
Amortization of deferred financing costs		1,027			198			(127	)		1,098
Amortization of unearned purchase discounts		(1,616	)		—			—			(1,616	)
Amortization of deferred gains from sale-leaseback transactions		(505	)		(160	)		(232	)		(897	)
Impairment losses		224			608			—			832
Accretion of interest on lease financing obligations		(53	)		343			(9	)		281
Deferred income taxes		123			(222	)		258			159
Gain on settlements of lease financing obligations, net		(309	)		—			189			(120	)
Changes in other operating assets and liabilities		2,815			(11,029	)		10,405			2,191

Net cash provided from operating activities		25,510			11,342			—			36,852

Cash flows provided from (used for) investing activities:
Capital expenditures:
New restaurant development		(87	)		(20,283	)		—			(20,370	)
Restaurant remodeling		(3,474	)		(1,411	)		—			(4,885	)
Other restaurant capital expenditures		(2,489	)		(2,989	)		—			(5,478	)
Corporate and restaurant information systems		(982	)		(342	)		—			(1,324	)

Total capital expenditures		(7,032	)		(25,025	)		—			(32,057	)
Properties purchased for sale-leaseback		(1,008	)		(1,655	)		—			(2,663	)
Deposit on properties purchased for sale-leaseback		—			—			—			—
Proceeds from sales of other properties		10,348			10,801			10,544			31,693

Net cash provided from (used for) investing activities		2,308			(15,879	)		10,544			(3,027	)

Cash flows provided from (used for) financing activities:
Scheduled principal payments on term loans		(1,650	)		—			—			(1,650	)
Principal payments on capital leases		(118	)		(187	)		—			(305	)
Principal pre-payments on term loans		(23,200	)		—			—			(23,200	)
Settlement of lease financing obligations		(8,660	)		(6,555	)		—			(15,215	)
Proceeds from lease financing obligations		—			11,130			(11,130	)		—
Financing costs associated with issuance of debt and lease financing obligations		—			(586	)		586			—

Net cash provided from (used for) financing activities		(33,628	)		3,802			(10,544	)		(40,370	)

Net decrease in cash and cash equivalents		(5,810	)		(735	)		—			(6,545	)
Cash and cash equivalents, beginning of period		7,493			1,838			—			9,331

Cash and cash equivalents, end of period	$	1,683		$	1,103		$	—		$	2,786

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

Throughout this Quarterly Report on Form 10-Q, we refer to Carrols Restaurant Group, Inc. as “Carrols Restaurant Group” and, together with its consolidated subsidiaries, as “we”, “our” and “us” unless otherwise indicated or the context otherwise requires. Any reference to “Carrols” refers to our wholly-owned subsidiary, Carrols Corporation, a Delaware corporation, and its consolidated subsidiaries, unless otherwise indicated or the context otherwise requires. This combined Quarterly Report on Form 10-Q is filed by both Carrols Restaurant Group and its wholly owned subsidiary, Carrols.

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 31, 2006 and January 1, 2006 will be referred to as the fiscal years ended December 31, 2006 and 2005, respectively. Similarly, all references herein to the three and nine months ended September 30, 2007 and October 1, 2006 will be referred to as the three

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