Edgar Filing: CARROLS RESTAURANT GROUP, INC.

Quarterly Report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

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

For the quarterly period ended June 29, 2008

¨	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

Commission File Number: 001-06553

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

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

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, non-accelerated filers or smaller reporting companies. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act, (Check one):

Carrols Restaurant Group, Inc.


Large accelerated filer ¨		Accelerated filer x
Non-accelerated filer (Do not check if a smaller reporting company) ¨		Smaller reporting company ¨

Carrols Corporation


Large accelerated filer ¨		Accelerated filer ¨
Non-accelerated filer (Do not check if a smaller reporting company) x		Smaller reporting company ¨

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 August 1, 2008, Carrols Restaurant Group, Inc. had 21,573,809 shares of its common stock, $.01 par value, outstanding. As of August 1, 2008, 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 JUNE 30, 2008


		Page
PART I	FINANCIAL INFORMATION

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

	Consolidated Balance Sheets as of June 30, 2008 and December 31, 2007	3

	Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2008 and 2007	4

	Consolidated Statements of Cash Flows for the Six Months ended June 30, 2008 and 2007	5

	Notes to Consolidated Financial Statements	6

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

	Consolidated Balance Sheets as of June 30, 2008 and December 31, 2007	17

	Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2008 and 2007	18

	Consolidated Statements of Cash Flows for the Six Months ended June 30, 2008 and 2007	19

	Notes to Consolidated Financial Statements	20

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	39

Item 3	Quantitative and Qualitative Disclosures About Market Risk	54

Item 4	Controls and Procedures	54

PART II	OTHER INFORMATION

Item 1	Legal Proceedings	54

Item 1A	Risk Factors	54

Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	54

Item 3	Default Upon Senior Securities	54

Item 4	Submission of Matters to a Vote of Security Holders	54

Item 5	Other Information	55

Item 6	Exhibits	55

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)


	June 30, 2008			December 31, 2007
ASSETS
Current assets:
Cash and cash equivalents	$	4,432		$	7,396
Trade and other receivables		5,885			4,734
Inventories		5,145			5,339
Prepaid rent		2,878			2,803
Prepaid expenses and other current assets		6,961			6,172
Deferred income taxes		4,784			4,802

Total current assets		30,085			31,246
Property and equipment, net		211,953			200,325
Franchise rights, net (Note 4)		78,469			80,052
Goodwill (Note 4)		124,934			124,934
Intangible assets, net		742			887
Franchise agreements, at cost less accumulated amortization of $5,681 and $5,646, respectively		5,657			5,548
Deferred income taxes		10,336			10,559
Other assets		11,405			12,007

Total assets	$	473,581		$	465,558

LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Current portion of long-term debt (Note 5)	$	6,117		$	3,129
Accounts payable		21,208			20,054
Accrued interest		7,844			8,148
Accrued payroll, related taxes and benefits		16,295			18,669
Accrued income taxes payable		1,964			933
Accrued real estate taxes		3,607			3,312
Other liabilities		11,610			10,113

Total current liabilities		68,645			64,358
Long-term debt, net of current portion (Note 5)		302,712			298,154
Lease financing obligations (Note 9)		47,315			52,689
Deferred income—sale-leaseback of real estate		31,731			31,348
Accrued postretirement benefits (Note 8)		2,886			3,022
Other liabilities (Note 7)		21,450			22,822

Total liabilities		474,739			472,393
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—21,571,871 and 21,571,565 shares, respectively		216			216
Additional paid-in capital		(625	)		(1,591	)
Accumulated deficit		(1,977	)		(6,680	)
Accumulated other comprehensive income		1,369			1,361
Treasury stock, at cost		(141	)		(141	)

Total stockholders’ deficit		(1,158	)		(6,835	)

Total liabilities and stockholders’ deficit	$	473,581		$	465,558

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 SIX MONTHS ENDED JUNE 30, 2008 AND 2007

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

(Unaudited)


	Three months ended June 30,					Six months ended June 30,
	2008			2007		2008			2007
Revenues:
Restaurant sales	$	210,331		$	200,117	$	405,724		$	387,983
Franchise royalty revenues and fees		351			332		711			669

Total revenues		210,682			200,449		406,435			388,652

Costs and expenses:
Cost of sales		63,943			57,375		121,572			109,669
Restaurant wages and related expenses (including stock-based compensation expense of $57, $39, $114 and $76, respectively)		60,763			58,562		119,304			114,510
Restaurant rent expense		11,568			10,907		23,051			21,586
Other restaurant operating expenses		31,348			28,534		60,893			56,481
Advertising expense		9,224			8,449		17,048			16,984
General and administrative (including stock-based compensation expense of $435, $315, $852 and $633, respectively)		13,717			13,305		26,712			26,451
Depreciation and amortization		8,077			7,887		16,099			15,578
Impairment losses (Note 3)		81			69		102			69
Other income (Note 10)		(119	)		—		(119	)		(347	)

Total operating expenses		198,602			185,088		384,662			360,981

Income from operations		12,080			15,361		21,773			27,671
Interest expense		7,123			7,601		14,557			15,957
Loss (gain) on extinguishment of debt (Note 5)		(180	)		—		(180	)		1,485

Income before income taxes		5,137			7,760		7,396			10,229
Provision for income taxes (Note 6)		1,880			2,662		2,693			3,554

Net income	$	3,257		$	5,098	$	4,703		$	6,675

Basic and diluted net income per share (Note 13)	$	0.15		$	0.24	$	0.22		$	0.31

Basic weighted average common shares outstanding (Note 13)		21,571,652			21,550,827		21,571,609			21,550,827
Diluted weighted average common shares outstanding (Note 13)		21,575,405			21,565,208		21,574,825			21,561,795

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

CARROLS RESTAURANT GROUP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

SIX MONTHS ENDED JUNE 30, 2008 AND 2007

(In thousands of dollars)

(Unaudited)


	2008			2007
Cash flows provided from operating activities:
Net income	$	4,703		$	6,675
Adjustments to reconcile net income to net cash provided from operating activities:
Loss (gain) on disposals of property and equipment		(12	)		109
Stock-based compensation expense		966			709
Depreciation and amortization		16,099			15,578
Amortization of deferred financing costs		595			638
Amortization of unearned purchase discounts		(1,077	)		(1,078	)
Amortization of deferred gains from sale-leaseback transactions		(1,044	)		(969	)
Impairment losses		102			69
Loss (gain) on settlements of lease financing obligations		31			(163	)
Accretion of interest on lease financing obligations		120			262
Deferred income taxes		249			(210	)
Accrued income taxes		1,031			3,958
Loss (gain) on extinguishment of debt		(180	)		1,485
Changes in other operating assets and liabilities		(2,203	)		2,524

Net cash provided from operating activities		19,380			29,587

Cash flows used for investing activities:
Capital expenditures:
New restaurant development		(16,385	)		(18,720	)
Restaurant remodeling		(6,168	)		(3,244	)
Other restaurant capital expenditures		(4,091	)		(4,270	)
Corporate and restaurant information systems		(2,585	)		(1,493	)

Total capital expenditures		(29,229	)		(27,727	)
Properties purchased for sale-leaseback		—			(2,461	)
Proceeds from sale-leaseback transactions		4,657			2,473
Proceeds from sales of other properties		119			979

Net cash used for investing activities		(24,453	)		(26,736	)

Cash flows provided from (used for) financing activities:
Repayment of term loans under prior credit facility		—			(118,400	)
Borrowings on revolving credit facility		62,400			11,600
Repayments on revolving credit facility		(52,900	)		(11,600	)
Proceeds from new senior credit facility		—			120,000
Principal payments on capital leases		(71	)		(205	)
Expenses from initial public offering		—			(21	)
Financing costs associated with issuance of debt		—			(1,228	)
Repurchase of senior subordinated notes		(1,820	)		—
Settlement of lease financing obligations		(5,500	)		(4,412	)

Net cash provided from (used for) financing activities		2,109			(4,266	)

Net decrease in cash and cash equivalents		(2,964	)		(1,415	)
Cash and cash equivalents, beginning of period		7,396			3,939

Cash and cash equivalents, end of period	$	4,432		$	2,524

Supplemental disclosures:
Interest paid on long-term debt	$	11,596		$	12,912
Interest paid on lease financing obligations	$	2,520		$	2,476
Increase in accruals for capital expenditures	$	220		$	196
Income taxes paid (refunded), net	$	1,414		$	(195	)
Capital lease obligations incurred	$	117		$	—

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 June 30, 2008 the Company operated, as franchisee, 319 quick-service restaurants under the trade name “Burger King” in 12 Northeastern, Midwestern and Southeastern states. At June 30, 2008, the Company also owned and operated 88 Pollo Tropical restaurants, of which 85 were located in Florida and three were located in New Jersey, and franchised a total of 27 Pollo Tropical restaurants, 23 in Puerto Rico, two in Ecuador and two on college campuses in Florida. At June 30, 2008, the Company owned and operated 150 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 30, 2007 and December 31, 2006 will be referred to as the fiscal years ended December 31, 2007 and 2006, respectively. Similarly, all references herein to the three and six months ended June 29, 2008 and July 1, 2007 will be referred to as the three and six months ended June 30, 2008 and June 30, 2007, respectively. The years ended December 31, 2007 and 2006 each contained 52 weeks and the three and six months ended June 30, 2008 and 2007 contained thirteen and twenty-six weeks, respectively.

Basis of Presentation. The accompanying unaudited consolidated financial statements for the three and six months ended June 30, 2008 and 2007 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 six months ended June 30, 2008 and 2007 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, 2007 contained in the Company’s 2007 Annual Report on Form 10-K. The December 31, 2007 balance sheet data is derived from those audited financial statements.

Reclassification of previously issued interim financial statements. The Company has reclassified certain prior year amounts related to its Pollo Tropical restaurant expenses from cost of sales to other restaurant operating expenses in order to conform to the 2008 presentation in the Company’s interim results of operations and the presentation in the Company’s 2007 Annual Report on Form 10-K. The amount of increase (decrease) in previously reported interim amounts was as follows:


	Three Months Ended June 30, 2007			Six Months Ended June 30, 2007
Cost of sales	$	(264	)	$	(527	)
Other restaurant operating expenses		264			527

Total	$	—		$	—

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.

On January 15, 2008, the Company granted options to purchase 517,820 shares of its common stock, consisting of 160,000 shares of non-qualified stock options and 357,820 shares of incentive stock options (“ISOs”), and issued 7,100 shares of restricted stock. The non-qualified stock options and ISOs granted are exercisable for up to one-fifth of the total number of option shares on or after the first anniversary of the grant date and as of the first day of each month thereafter are exercisable for an additional one-sixtieth of the total number of option shares until fully exercisable. The options expire seven years from the date of the grant and were issued with an exercise price equal to the fair market value of the stock price, or $8.08 per share of common stock, on the date of grant. The restricted stock awards vest 100% on the third anniversary of the award date.

During the three months ended June 30, 2008 an aggregate of 10,500 non-qualified stock options were granted to three non-employee directors under the 2006 Plan. The options were issued with an exercise price equal to the fair market value of the stock price, or $6.43 per share of common stock, on the date of grant and generally vest 20% per year. During the three months ended June 30, 2007, there were an aggregate of 1,000 restricted shares granted to certain employees and an aggregate of 10,500 non-qualified options granted to three non-employee directors under the 2006 Plan. The stock options granted to the non-employee directors vest 20% per year and the restricted shares granted to employees vest 33% per year.

The Company currently uses and will continue to use the simplified method to estimate the expected term for share option grants until it has enough historical experience to provide a reasonable estimate of expected term in accordance with Staff Accounting Bulletin No. 110 (“SAB 110”). The weighted average fair-value of options granted during the three months ended June 30, 2008 was $1.96 which was estimated using the Black-Scholes option pricing model with the following weighted-average assumptions:


	2008
Risk-free interest rate	3.22	%
Annual dividend yield	0	%
Expected term	4 years
Expected volatility	33	%

Stock-based compensation expense for the three and six months ended June 30, 2008 was $0.5 million and $1.0 million, respectively and for the three and six months ended June 30, 2007 was $0.4 million and $0.7 million, respectively.

As of June 30, 2008, the total non-vested stock-based compensation expense relating to the options and restricted shares is approximately $4.7 million and the Company expects to record an additional $1.0 million as compensation expense in 2008. The remaining weighted average vesting period for the stock options is 3.89 years and restricted shares is approximately 2.18 years at June 30, 2008.

Stock Options

A summary of all option activity for the six months ended June 30, 2008 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, 2008	1,214,690		$	14.31	6.0	$	—
Granted	528,320			8.05
Forfeited	(42,712	)		11.95

Options outstanding at June 30, 2008	1,700,298		$	12.41	5.8	$	—

Expected to vest at June 30, 2008	1,306,931		$	11.90	5.9	$	—

Options exercisable at June 30, 2008	358,059		$	14.31	5.5	$	—

CARROLS RESTAURANT GROUP, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

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

(1)	The aggregate intrinsic value was calculated using the difference between the market price of the Company’s common stock at June 30, 2008 and the grant price for only those awards that have a grant price that is less than the market price of the Company’s common stock at June 30, 2008.

Restricted Shares

The restricted stock activity for the six months ended June 30, 2008 was as follows:


	Shares		Weighted Average Grant Date Fair Value
Nonvested at January 1, 2008	55,398		$	13.22
Shares granted	7,100			8.08
Shares vested	(306	)		16.00
Shares forfeited	(2,664	)		12.86

Nonvested at June 30, 2008	59,528			12.60

The value of restricted shares is determined based on the Company’s closing 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.

For the three and six months ended June 30, 2008 and 2007, the Company recorded impairment losses on long-lived assets for its segments as follows:


	Three Months Ended June 30,				Six Months Ended June 30,
	Three Months Ended June 30,				Six Months Ended June 30,
	2008		2007		2008		2007
Burger King	$	71	$	14	$	92	$	14
Taco Cabana		10		55		10		55

	$	81	$	69	$	102	$	69

4. Goodwill and Franchise Rights

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
Balance, June 30, 2008	$	56,307	$	67,177	$	1,450	$	124,934

CARROLS RESTAURANT GROUP, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

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

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 recorded against franchise rights for the three and six months ended June 30, 2008 and 2007.

Amortization expense related to Burger King franchise rights was $799 and $804 for the three months ended June 30, 2008 and 2007, respectively. Amortization expense related to Burger King franchise rights was $1,600 and $1,608 for the six months ended June 30, 2008 and 2007. The estimated amortization expense for the year ending December 31, 2008 is $3,197 and for each of the five succeeding years is $3,196.

5. Long-term Debt

Long-term debt at June 30, 2008 and December 31, 2007 consisted of the following:


	June 30, 2008			December 31, 2007
Collateralized:
Revolving Credit facility	$	9,500		$	—
Senior Credit Facility-Term loan A facility		120,000			120,000
Unsecured:
9% Senior Subordinated Notes		178,000			180,000
Capital leases		1,329			1,283

		308,829			301,283
Less: current portion		(6,117	)		(3,129	)

	$	302,712		$	298,154

On March 9, 2007, Carrols terminated and replaced its prior senior credit facility with a new senior credit facility with a syndicate of lenders. Carrols’ 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 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 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 six months ended June 30, 2007 for the write-off of deferred financing costs related to the prior senior credit facility.

The term loan and revolving credit borrowings under the 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.

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 senior credit facility, Carrols is also required to make mandatory prepayments of principal on term loan A facility borrowings (a) annually in an initial amount equal to 50% of Excess Cash Flow depending upon Carrols’ Total Leverage Ratio (as such terms are defined in the 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.

CARROLS RESTAURANT GROUP, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

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

In general, Carrols’ obligations under the 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 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 senior credit facility). Carrols was in compliance with the covenants under its senior credit facility as of June 30, 2008.

At June 30, 2008, $120.0 million principal amount of term loan borrowings were outstanding under the term loan A facility and $9.5 million principal amount of borrowings were outstanding under the revolving credit facility. After reserving $14.2 million for letters of credit guaranteed by the facility, $41.3 million was available for borrowings under the revolving credit facility at June 30, 2008.

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. On April 7, 2008, Carrols purchased and retired $2.0 million of its senior subordinated notes in an open market transaction. This resulted in a gain on extinguishment of debt of $0.2 million in the three months ended June 30, 2008. At June 30, 2008 and December 31, 2007, $178.0 million and $180.0 million principal amount of the senior subordinated notes were outstanding, respectively.

6. Income Taxes

The provision for income taxes for the three and six months ended June 30, 2008 and 2007 was comprised of the following:


	Three Months Ended June 30,						Six Months Ended June 30,
	2008			2007			2008		2007
Current	$	1,945		$	2,872		$	2,444	$	3,764
Deferred		(65	)		(210	)		249		(210	)

	$	1,880		$	2,662		$	2,693	$	3,554

The provision for income taxes for the three and six months ended June 30, 2008 was derived using an estimated effective annual income tax rate for 2008 of 37.9%, which excludes any discrete tax adjustments. Discrete tax adjustments reduced the provision for income taxes by $66 and $112 for the three and six months ended June 30, 2008.

The provision for income taxes for the three and six months ended June 30, 2007 was derived using an estimated effective annual income tax rate for 2007 of 36.0%. The tax provision for the three and six months ended June 30, 2007 includes a reduction of tax expense of $0.4 million related to the recognition of additional employment tax credits, $0.2 million of additional tax expense related to a New York state income tax audit assessment and $0.1 million of additional tax expense associated with changes in New York state tax legislation enacted in the second quarter of 2007. The net reduction of income tax expense of $0.1 million for these items was recorded in the second quarter.

The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. As of June 30, 2008, the Company had no unrecognized tax benefits and no accrued interest related to uncertain tax positions.

The tax years 2004-2007 remain open to examination by the major taxing jurisdictions to which the Company is subject. It is not possible to reasonably estimate any possible change in the unrecognized tax benefits within the next twelve months.

CARROLS RESTAURANT GROUP, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

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

7. Other Liabilities, Long-Term

Other liabilities, long-term, at June 30, 2008 and December 31, 2007 consisted of the following:


	June 30, 2008		December 31, 2007
Unearned purchase discounts	$	1,115	$	2,231
Accrued occupancy costs		10,229		9,667
Accrued workers’ compensation costs		4,156		4,418
Other		5,950		6,506

	$	21,450	$	22,822

In 2001, management decided to close seven Taco Cabana restaurants in the Phoenix, Arizona market and discontinue restaurant development underway in that market. At both June 30, 2008 and December 31, 2007, the Company had $0.5 million in lease liability reserves 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. On November 1, 2007 the Company amended its postretirement medical and life insurance benefits to eliminate life insurance benefits for active employees who retire after December 31, 2007 and to increase retiree contributions for both current and future retirees effective January 1, 2008. These amendments reduced the Company’s postretirement benefit obligations and reduced expense in the three and six months ended June 30, 2008.

The following summarizes the components of net periodic benefit cost:


	Three Months Ended June 30,					Six Months Ended June 30,
	2008			2007		2008			2007
Service cost	$	(24	)	$	128	$	14		$	246
Interest cost		(18	)		110		53			203
Amortization of gains and losses		3			31		44			48
Amortization of unrecognized prior service cost		(67	)		10		(180	)		3

Net periodic postretirement benefit cost (benefit)	$	(106	)	$	279	$	(69	)	$	500

During the three and six months ended June 30, 2008, the Company made contributions of $31 and $80 to its postretirement plan.

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 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.

In the second quarter of 2008, the Company purchased from the lessor six restaurant properties for $5.5 million that were previously accounted for as lease financing obligations. As a result, the Company reduced its lease financing obligations by $5.5 million and recorded a loss of $31 as an increase to interest expense which represented the amount by which the purchase price exceeded the lease financing obligations.

In 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 acquired restaurant properties.

CARROLS RESTAURANT GROUP, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

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

Interest expense associated with lease financing obligations, including settlement gains and losses, for the three months ended June 30, 2008 and 2007 was $1.4 million and $1.3 million, respectively, and for the six months ended June 30, 2008 and 2007 was $2.7 million and $2.8 million, respectively.

10. Other Income

The Company recorded a gain of $0.1 million in the three and six months ended June 30, 2008 and a gain of $0.3 million in the six months ended June 30, 2007 each related to the sale of a Taco Cabana property.

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.

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, other income and expense and loss (gain) on extinguishment of debt.

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 including restaurant information systems expenditures, 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)


Three Months Ended	Pollo Tropical		Taco Cabana		Burger King		Other		Consolidated
June 30, 2008:
Total revenues	$	45,404	$	63,436	$	101,842	$	—	$	210,682
Cost of sales		15,312		19,540		29,091		—		63,943
Restaurant wages and related expenses		10,899		18,594		31,213		57		60,763
General and administrative expenses (1)		2,762		3,006		7,514		435		13,717
Depreciation and amortization		2,000		2,091		3,611		375		8,077
Segment EBITDA		6,733		5,789		8,089
Capital expenditures, including acquisitions		4,862		6,158		3,479		1,881		16,380

June 30, 2007:
Total revenues	$	42,747	$	60,774	$	96,928	$	—	$	200,449
Cost of sales		13,885		17,975		25,515		—		57,375
Restaurant wages and related expenses		10,634		17,394		30,495		39		58,562
General and administrative expenses (1)		2,547		2,728		7,715		315		13,305
Depreciation and amortization		1,669		2,121		3,758		339		7,887
Segment EBITDA		7,254		8,024		8,393
Capital expenditures, including acquisitions		6,810		5,387		3,347		1,302		16,846

Six Months Ended
June 30, 2008:
Total revenues	$	89,736	$	123,693	$	193,006	$	—	$	406,435
Cost of sales		29,653		38,376		53,543		—		121,572
Restaurant wages and related expenses		22,199		36,244		60,747		114		119,304
General and administrative expenses (1)		5,328		6,012		14,520		852		26,712
Depreciation and amortization		3,916		4,162		7,249		772		16,099
Segment EBITDA		12,737		12,371		13,713
Capital expenditures, including acquisitions		11,408		9,040		6,196		2,585		29,229

June 30, 2007:
Total revenues	$	84,286	$	118,968	$	185,398	$	—	$	388,652
Cost of sales		27,014		34,953		47,702		—		109,669
Restaurant wages and related expenses		20,965		33,874		59,595		76		114,510
General and administrative expenses (1)		5,036		5,601		15,181		633		26,451
Depreciation and amortization		3,164		4,174		7,601		639		15,578
Segment EBITDA		14,086		15,375		14,219
Capital expenditures, including acquisitions		13,240		8,043		4,951		1,493		27,727

Identifiable Assets:
At June 30, 2008	$	66,924	$	81,209	$	147,460	$	177,988	$	473,581
At December 31, 2007		59,609		79,370		148,467		178,112		465,558

(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 three 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 June 30,					Six Months Ended June 30,
	2008			2007		2008			2007
Segment EBITDA:
Pollo Tropical	$	6,733		$	7,254	$	12,737		$	14,086
Taco Cabana		5,789			8,024		12,371			15,375
Burger King		8,089			8,393		13,713			14,219

Subtotal		20,611			23,671		38,821			43,680
Less:
Depreciation and amortization		8,077			7,887		16,099			15,578
Impairment losses		81			69		102			69
Interest expense		7,123			7,601		14,557			15,957
Provision for income taxes		1,880			2,662		2,693			3,554
Stock-based compensation expense		492			354		966			709
Loss (gain) on extinguishment of debt		(180	)		—		(180	)		1,485
Other income		(119	)		—		(119	)		(347	)

Net income	$	3,257		$	5,098	$	4,703		$	6,675

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 were 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. 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 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. The Company does not believe that any individual claim, if any, would have a material adverse impact on its consolidated financial statements. 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 (the “Court”) entitled Dawn Seever, et al. v. Carrols Corporation. The lawsuit alleged, 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 sought damages, costs and injunctive relief. They also sought to notify and certify, a class consisting of current and former employees who, since 1998, have worked, or are working, for Carrols. On December 17, 2007, the Court issued a decision and order denying Plaintiffs’ motion for notice and class certification and granting the Company’s motion to dismiss all of the claims of the plaintiffs, other than certain nominal claims relating to orientation and managers’ meetings. The Court instructed the parties to confer, in good faith, and settle those nominal claims. Subject to settlement of the amounts for orientation and managers’ meetings and possible appeal by the Plaintiffs, the case is concluded. The Company does not believe that these settlement amounts will be material to its consolidated financial statements.

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.

CARROLS RESTAURANT GROUP, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

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

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 1,099,544 and 631,375 shares of common stock for each of the three and six months ended June 30, 2008 and 2007, respectively, because the exercise price of these options was greater than the average market price of the common shares in the periods and therefore, they were antidilutive. In addition, options to purchase 2,538 and 620,875 shares of common stock are excluded from the computation of diluted net income per share in each of the three and six months ended June 30, 2008 and 2007, respectively, as they were antidilutive under the treasury stock method.

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 June 30,				Six months ended June 30,
	2008		2007		2008		2007
Basic net income per share:
Net income	$	3,257	$	5,098	$	4,703	$	6,675
Weighted average common shares outstanding		21,571,652		21,550,827		21,571,609		21,550,827
Basic net income per share	$	0.15	$	0.24	$	0.22	$	0.31
Diluted net income per share:
Net income for diluted net income per share	$	3,257	$	5,098	$	4,703	$	6,675
Shares used in computed basic net income per share		21,571,652		21,550,827		21,571,609		21,550,827
Dilutive effect of restricted shares and stock options		3,753		14,381		3,216		10,968

Shares used in computed diluted net income per share		21,575,405		21,565,208		21,574,825		21,561,795

Diluted net income per share	$	0.15	$	0.24	$	0.22	$	0.31

14. Comprehensive income

SFAS No. 130, “Reporting Comprehensive Income” (“SFAS 130”), requires the disclosure of certain revenue, expenses, gains and losses that are excluded from net income in accordance with U.S. generally accepted accounting principles. The items that currently impact the Company’s other comprehensive income are changes in postretirement benefit obligations, net of tax.


	Three months ended June 30,				Six months ended June 30,
	2008		2007		2008		2007
Net income	$	3,257	$	5,098	$	4,703	$	6,675
Change in postretirement benefit obligation, net of tax		—		—		8		—

Comprehensive income	$	3,257	$	5,098	$	4,711	$	6,675

15. Recent Accounting Developments

In September 2006, the Financial Accounting Standards Board (“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. In February 2007, the FASB issued FSP FAS 157-2, delaying the effective date of SFAS 157 for certain nonfinancial assets and liabilities to fiscal years beginning after November 15, 2008. The implementation of SFAS 157 for financial assets and financial liabilities, effective for fiscal 2008, did not have a material impact on the Company’s consolidated financial statements. The Company is currently evaluating the impact SFAS 157 may have for nonfinancial assets and liabilities in its consolidated financial statements.

CARROLS RESTAURANT GROUP, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

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

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 did not elect to begin reporting any financial assets or liabilities at fair value upon adoption of this standard.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financials Statements, an Amendment of ARB No. 51” (“SFAS 160”). SFAS 160 clarifies the accounting for non controlling interests and establishes accounting and reporting standards for the noncontrolling interest in a subsidiary, including classification as a component of equity. SFAS 160 is effective for fiscal years beginning after December 15, 2008. The Company is currently evaluating the impact SFAS 160 will have on its consolidated financial statements.

In April 2008, the FASB issued FSP SFAS No. 142-3 “Determination of the Useful Life of Intangible Assets” (“SFAS 142-3”). SFAS 142-3 amends the factors that should be considered in developing renewal or extension assumption used to determine the useful life of a recognized intangible asset under SFAS No. 142. The requirement for determining useful lives must be applied prospectively to intangible assets acquired after the effective date and the disclosure requirements applied prospectively to all intangible assets recognized as of, and subsequent to, the effective date. SFAS No. 142-3 is effective for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years, which will require the Company to adopt these provisions in the first quarter of 2009. The Company has reviewed this pronouncement and does not anticipate the adoption of SFAS No. 142-3 will materially impact its 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)


	June 30, 2008			December 31, 2007
ASSETS
Current assets:
Cash and cash equivalents	$	4,432		$	7,396
Trade and other receivables		5,885			4,734
Inventories		5,145			5,339
Prepaid rent		2,878			2,803
Prepaid expenses and other current assets		6,961			6,172
Deferred income taxes		4,784			4,802

Total current assets		30,085			31,246

Property and equipment, net		211,953			200,325
Franchise rights, net (Note 4)		78,469			80,052
Goodwill (Note 4)		124,934			124,934
Intangible assets, net		742			887
Franchise agreements, at cost less accumulated amortization of $5,681 and $5,646, respectively		5,657			5,548
Deferred income taxes		10,336			10,559
Other assets		11,405			12,007

Total assets	$	473,581		$	465,558

LIABILITIES AND STOCKHOLDER’S DEFICIT
Current liabilities:
Current portion of long-term debt (Note 5)	$	6,117		$	3,129
Accounts payable		21,208			20,054
Accrued interest		7,844			8,148
Accrued payroll, related taxes and benefits		16,295			18,669
Accrued income taxes payable		1,964			933
Accrued real estate taxes		3,607			3,312
Other liabilities		11,610			10,113

Total current liabilities		68,645			64,358

Long-term debt, net of current portion (Note 5)		302,712			298,154
Lease financing obligations (Note 9)		47,315			52,689
Deferred income—sale-leaseback of real estate		31,731			31,348
Accrued postretirement benefits (Note 8)		2,886			3,022
Other liabilities (Note 7)		21,409			22,784

Total liabilities		474,698			472,355

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		(8,118	)		(9,084	)
Accumulated earnings		5,632			926
Accumulated other comprehensive income		1,369			1,361

Total stockholder’s deficit		(1,117	)		(6,797	)

Total liabilities and stockholder’s deficit	$	473,581		$	465,558

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

CARROLS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

THREE AND SIX MONTHS ENDED JUNE 30, 2008 AND 2007

(In thousands of dollars)

(Unaudited)


	Three months ended June 30,					Six months ended June 30,
	2008			2007		2008			2007
Revenues:
Restaurant sales	$	210,331		$	200,117	$	405,724		$	387,983
Franchise royalty revenues and fees		351			332		711			669

Total revenues		210,682			200,449		406,435			388,652


Costs and expenses:
Cost of sales		63,943			57,375		121,572			109,669
Restaurant wages and related expenses (including stock-based compensation expense of $57, $39, $114 and $76, respectively)		60,763			58,562		119,304			114,510
Restaurant rent expense		11,568			10,907		23,051			21,586
Other restaurant operating expenses		31,348			28,534		60,893			56,481
Advertising expense		9,224			8,449		17,048			16,984
General and administrative (including stock-based compensation expense of $435, $315, $852 and $633, respectively)		13,716			13,304		26,709			26,448
Depreciation and amortization		8,077			7,887		16,099			15,578
Impairment losses (Note 3)		81			69		102			69
Other income (Note 10)		(119	)		—		(119	)		(347	)

Total operating expenses		198,601			185,087		384,659			360,978

Income from operations		12,081			15,362		21,776			27,674
Interest expense		7,123			7,601		14,557			15,957
Loss (gain) on extinguishment of debt (Note 5)		(180	)		—		(180	)		1,485

Income before income taxes		5,138			7,761		7,399			10,232
Provision for income taxes (Note 6)		1,880			2,662		2,693			3,554

Net income	$	3,258		$	5,099	$	4,706		$	6,678

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

CARROLS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

SIX MONTHS ENDED JUNE 30, 2008 AND 2007

(In thousands of dollars)

(Unaudited)


	2008			2007
Cash flows provided from operating activities:
Net income	$	4,706		$	6,678
Adjustments to reconcile net income to net cash provided from operating activities:
Loss (gain) on disposals of property and equipment		(12	)		109
Stock-based compensation expense		966			709
Depreciation and amortization		16,099			15,578
Amortization of deferred financing costs		595			638
Amortization of unearned purchase discounts		(1,077	)		(1,078	)
Amortization of deferred gains from sale-leaseback transactions		(1,044	)		(969	)
Impairment losses		102			69
Accretion of interest on lease financing obligations		120			262
Deferred income taxes		249			(210	)
Accrued income taxes		1,031			3,958
Loss (gain) on extinguishment of debt		(180	)		1,485
Loss (gain) on settlements of lease financing obligations		31			(163	)
Changes in other operating assets and liabilities		(2,206	)		2,521

Net cash provided from operating activities		19,380			29,587

Cash flows used for investing activities:
Capital expenditures:
New restaurant development		(16,385	)		(18,720	)
Restaurant remodeling		(6,168	)		(3,244	)
Other restaurant capital expenditures		(4,091	)		(4,270	)
Corporate and restaurant information systems		(2,585	)		(1,493	)

Total capital expenditures		(29,229	)		(27,727	)
Properties purchased for sale-leaseback		—			(2,461	)
Proceeds from sale-leaseback transactions		4,657			2,473
Proceeds from sales of other properties		119			979

Net cash used for investing activities		(24,453	)		(26,736	)

Cash flows provided from (used for) financing activities:
Repayment of term loans under prior credit facility		—			(118,400	)
Borrowings on revolving credit facility		62,400			11,600
Repayments on revolving credit facility		(52,900	)		(11,600	)
Proceeds from new senior credit facility		—			120,000
Settlement of lease financing obligations		(5,500	)		(4,412	)
Repurchase of senior subordinated notes		(1,820	)		—
Principal payments on capital leases		(71	)		(205	)
Expenses from initial public offering		—			(21	)
Financing costs associated with issuance of debt		—			(1,228	)

Net cash provided from (used for) financing activities		2,109			(4,266	)

Net decrease in cash and cash equivalents		(2,964	)		(1,415	)
Cash and cash equivalents, beginning of period		7,396			3,939

Cash and cash equivalents, end of period	$	4,432		$	2,524

Supplemental disclosures:
Interest paid on long-term debt	$	11,596		$	12,912
Interest paid on lease financing obligations	$	2,520		$	2,476
Increase in accruals for capital expenditures	$	220		$	196
Income taxes paid (refunded), net	$	1,414		$	(195	)
Capital lease obligations incurred	$	117		$	—

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

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

(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 Corporation and its subsidiaries (“the Company”). The Company is a wholly-owned subsidiary of Carrols Restaurant Group, Inc. (“Carrols Restaurant Group” or the “Parent Company”). 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.

Business Description. At June 30, 2008 the Company operated, as franchisee, 319 quick-service restaurants under the trade name “Burger King” in 12 Northeastern, Midwestern and Southeastern states. At June 30, 2008, the Company also owned and operated 88 Pollo Tropical restaurants of which 85 were located in Florida and three were located in New Jersey, and franchised a total of 27 Pollo Tropical restaurants, 23 in Puerto Rico, two in Ecuador and two on college campuses in Florida. At June 30, 2008, the Company owned and operated 150 Taco Cabana restaurants located primarily in Texas and franchised two Taco Cabana restaurants in New Mexico and one in Georgia.


	Three Months Ended June 30, 2007			Six Months Ended June 30, 2007
Cost of sales	$	(264	)	$	(527	)
Other restaurant operating expenses		264			527

Total	$	—		$	—

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

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

Earnings Per Share Presentation. The guidance of Statement of Financial Accounting Standards (“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.

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.

On January 15, 2008, Carrols Restaurant Group granted options to purchase 517,820 shares of its common stock, consisting of 160,000 shares of non-qualified stock options and 357,820 shares of incentive stock options (“ISOs”), and issued 7,100 shares of restricted stock. The non-qualified stock options and ISOs granted are exercisable for up to one-fifth of the total number of option shares on or after the first anniversary of the grant date and as of the first day of each month thereafter are exercisable for an additional one-sixtieth of the total number of option shares until fully exercisable. The options expire seven years from the date of the grant and were issued with an exercise price equal to the fair market value of the stock price, or $8.08 per share of common stock, on the date of grant. The restricted stock awards vest 100% on the third anniversary of the award date.

During the three months ended June 30, 2008 an aggregate of 10,500 non-qualified stock options were granted to three non-employee directors under the 2006 Plan. The options were issued with an exercise price equal to the fair market value of the stock price, or $6.43 per share of common stock, on the date of grant and generally vest 20% per year. During the three months ended June 30, 2007, there were an aggregate of 1,000 restricted shares granted to certain employees and an aggregate of 10,500 non-qualified stock options granted to three non-employee directors under the 2006 Plan. The stock options granted to the non-employee directors vest 20% per year and the restricted shares granted to employees vest 33% per year.


	2008
Risk-free interest rate	3.22	%
Annual dividend yield	0	%
Expected term	4 years
Expected volatility	33	%

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

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

Stock Options

A summary of all option activity for the six months ended June 30, 2008 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, 2008	1,214,690		$	14.31	6.0	$	—
Granted	528,320			8.05
Forfeited	(42,712	)		11.95

Options outstanding at June 30, 2008	1,700,298		$	12.41	5.8	$	—

Expected to vest at June 30, 2008	1,306,931		$	11.90	5.9	$	—

Options exercisable at June 30, 2008	358,059		$	14.31	5.5	$	—

(1)

The aggregate intrinsic value was calculated using the difference between the market price of Carrols Restaurant Group’s common stock at June 30, 2008 and the grant price for only those awards that have a grant price that is less than the market price of Carrols Restaurant Group’s common stock at June 30, 2008.

Restricted Shares

The restricted stock activity for the six months ended June 30, 2008 was as follows:


	Shares		Weighted Average Grant Date Fair Value
Nonvested at January 1, 2008	55,398		$	13.22
Shares granted	7,100			8.08
Shares vested	(306	)		16.00
Shares forfeited	(2,664	)		12.86

Nonvested at June 30, 2008	59,528			12.60

The value of restricted shares is determined based on Carrols Restaurant Group’s closing price on the date of grant.

3. Impairment of Long-Lived Assets

For the three and six months ended June 30, 2008, the Company recorded impairment losses on long-lived assets for its segments as follows:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2008		2007		2008		2007
Burger King	$	71	$	14	$	92	$	14
Taco Cabana		10		55		10		55

	$	81	$	69	$	102	$	69

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

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

4. Goodwill and Franchise Rights


	Pollo Tropical		Taco Cabana		Burger King		Total
Balance, June 30, 2008	$	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 recorded against franchise rights for the three and six months ended June 30, 2008 and 2007.

5. Long-term Debt

Long-term debt at June 30, 2008 and December 31, 2007 consisted of the following:


	June 30, 2008			December 31, 2007
Collateralized:
Revolving Credit facility	$	9,500		$	—
Senior Credit Facility-Term loan A facility		120,000			120,000
Unsecured:
9% Senior Subordinated Notes		178,000			180,000
Capital leases		1,329			1,283

		308,829			301,283
Less: current portion		(6,117	)		(3,129	)

	$	302,712		$	298,154

On March 9, 2007, the Company terminated and replaced its prior senior credit facility with a new senior credit facility with a syndicate of lenders. The Company’s 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 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 six months ended June 30, 2007 for the write-off of deferred financing costs related to the prior senior credit facility.

The term loan and revolving credit borrowings under the 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 and per 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 senior credit facility, the Company is also required to make mandatory prepayments of principal on term loan A facility borrowings (a) annually in an initial amount equal to 50% of Excess Cash Flow depending upon the Company’s Total Leverage Ratio (as such terms are defined in the 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 therefrom, 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 senior credit facility are guaranteed by Carrols Restaurant Group 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 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 senior credit facility). The Company was in compliance with the covenants under its new senior credit facility as of June 30, 2008.

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 Company’s ability to issue additional debt, incur liens, sell or acquire assets or businesses, pay dividends and make certain investments. On April 7, 2008, the Company purchased and retired $2.0 million of the senior subordinated notes in an open market transaction. This resulted in a gain on extinguishment of debt of $0.2 million in the three months ended June 30, 2008. At June 30, 2008 and December 31, 2007, $178.0 million and $180.0 million principal amount of the senior subordinated notes were outstanding, respectively.

6. Income Taxes

The provision for income taxes for the three and six months ended June 30, 2008 and 2007 was comprised of the following:


	Three Months Ended June 30,						Six Months Ended June 30,
	2008			2007			2008		2007
Current	$	1,945		$	2,872		$	2,444	$	3,764
Deferred		(65	)		(210	)		249		(210	)

	$	1,880		$	2,662		$	2,693	$	3,554

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

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

7. Other Liabilities, Long-Term

Other liabilities, long-term, at June 30, 2008 and December 31, 2006 consisted of the following:


	June 30,		December 31,
	2008		2007
Unearned purchase discounts	$	1,115	$	2,231
Accrued occupancy costs		10,229		9,667
Accrued workers’ compensation costs		4,156		4,418
Other		5,909		6,468

	$	21,409	$	22,784

In 2001, management decided to close seven Taco Cabana restaurants in the Phoenix, Arizona market and discontinue restaurant development underway in that market. At both June 30, 2008 and December 31, 2007, the Company had $0.5 million in lease liability reserves for the remaining locations that are included in accrued occupancy costs.

8. Postretirement Benefits

The following summarizes the components of net periodic benefit cost:


	Three Months Ended June 30,					Six Months Ended June 30,
	2008			2007		2008			2007
Service cost	$	(24	)	$	128	$	14		$	246
Interest cost		(18	)		110		53			203
Amortization of gains and losses		3			31		44			48
Amortization of unrecognized prior service cost		(67	)		10		(180	)		3

Net periodic postretirement benefit cost (benefit)	$	(106	)	$	279	$	(69	)	$	500

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

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

During the three and six months ended June 30, 2008, the Company made contributions of $31 and $80 to its postretirement plan.

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 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.

Interest expense associated with lease financing obligations, including settlement gains and losses, for the three months ended June 30, 2008 and 2007 was $1.4 million and $1.3 million, respectively and for the six months ended June 30, 2008 and 2007 was $2.7 million and $2.8 million, respectively.

10. Other Income

11. Business Segment Information

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

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


Three Months Ended	Pollo Tropical		Taco Cabana		Burger King		Other		Consolidated
June 30, 2008:
Total revenues	$	45,404	$	63,436	$	101,842	$	—	$	210,682
Cost of sales		15,312		19,540		29,091		—		63,943
Restaurant wages and related expenses		10,899		18,594		31,213		57		60,763
General and administrative expenses (1)		2,761		3,006		7,514		435		13,716
Depreciation and amortization		2,000		2,091		3,611		375		8,077
Segment EBITDA		6,734		5,789		8,089
Capital expenditures, including acquisitions		4,862		6,158		3,479		1,881		16,380
June 30, 2007:
Total revenues	$	42,747	$	60,774	$	96,928	$	—	$	200,449
Cost of sales		13,885		17,975		25,515		—		57,375
Restaurant wages and related expenses		10,634		17,394		30,495		39		58,562
General and administrative expenses (1)		2,546		2,728		7,715		315		13,304
Depreciation and amortization		1,669		2,121		3,758		339		7,887
Segment EBITDA		7,255		8,024		8,393
Capital expenditures, including acquisitions		6,810		5,387		3,347		1,302		16,846

Six Months Ended
June 30, 2008:
Total revenues	$	89,736	$	123,693	$	193,006	$	—	$	406,435
Cost of sales		29,653		38,376		53,543		—		121,572
Restaurant wages and related expenses		22,199		36,244		60,747		114		119,304
General and administrative expenses (1)		5,325		6,012		14,520		852		26,709
Depreciation and amortization		3,916		4,162		7,249		772		16,099
Segment EBITDA		12,740		12,371		13,713
Capital expenditures, including acquisitions		11,408		9,040		6,196		2,585		29,229
June 30, 2007:
Total revenues	$	84,286	$	118,968	$	185,398	$	—	$	388,652
Cost of sales		27,014		34,953		47,702		—		109,669
Restaurant wages and related expenses		20,965		33,874		59,595		76		114,510
General and administrative expenses (1)		5,033		5,601		15,181		633		26,448
Depreciation and amortization		3,164		4,174		7,601		639		15,578
Segment EBITDA		14,089		15,375		14,219
Capital expenditures, including acquisitions		13,240		8,043		4,951		1,493		27,727
Identifiable Assets:
At June 30, 2008	$	66,924	$	81,209	$	147,460	$	177,988	$	473,581
At December 31, 2007		59,609		79,370		148,467		178,112		465,558

(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 CORPORATION AND SUBSIDIARIES

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 June 30,					Six Months Ended June 30,
	2008			2007		2008			2007
Segment EBITDA:
Pollo Tropical	$	6,734		$	7,255	$	12,740		$	14,089
Taco Cabana		5,789			8,024		12,371			15,375
Burger King		8,089			8,393		13,713			14,219

Subtotal		20,612			23,672		38,824			43,683
Less:
Depreciation and amortization		8,077			7,887		16,099			15,578
Impairment losses		81			69		102			69
Interest expense		7,123			7,601		14,557			15,957
Provision for income taxes		1,880			2,662		2,693			3,554
Stock-based compensation expense		492			354		966			709
Loss (gain) on extinguishment of debt		(180	)		—		(180	)		1,485
Other income		(119	)		—		(119	)		(347	)

Net income	$	3,258		$	5,099	$	4,706		$	6,678

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. 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 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’ summary judgment motion. The Company does not believe that any individual claim, if any, would have a material adverse impact on its consolidated financial statements. 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 (the “Court”) entitled Dawn Seever, et al. v. the Company. The lawsuit alleged, 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 sought damages, costs and injunctive relief. They also sought to notify and certify, a class consisting of current and former employees who, since 1998, have worked, or are working, for the Company. On December 17, 2007, the Court issued a decision and order denying Plaintiffs’ motion for notice and class certification and granting the Company’s motion to dismiss all of the claims of the plaintiffs, other than certain nominal claims relating to orientation and managers’ meetings. The Court instructed the parties to confer, in good faith, and settle those nominal claims. Subject to settlement of the amounts for orientation and managers’ meetings and possible appeal by the Plaintiffs, the case is concluded. The Company does not believe that these settlement amounts will be material to its consolidated financial statements.

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

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

13. Comprehensive income


	Three months ended June 30,				Six months ended June 30,
	2008		2007		2008		2007
Net income	$	3,258	$	5,099	$	4,706	$	6,678
Change in postretirement benefit obligation, net of tax		—		—		8		—

Comprehensive income	$	3,258	$	5,099	$	4,714	$	6,678

14. Recent Accounting Developments

15. 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:

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

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

Cabana Beverages, Inc.

Cabana Bevco LLC

Carrols 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 June 30, 2008 and December 31, 2007 for the Parent Company only, Guarantor Subsidiaries and for the Company and the related statements of operations and cash flows for the three and six months ended June 30, 2008 and 2007.

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 for the Parent Company only and the Guarantor Subsidiaries, as calculated on the separate return method and the consolidated income tax provision 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.

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

CONSOLIDATING BALANCE SHEET

June 30, 2008

(In thousands of dollars)

(Unaudited)


	Parent Company Only			Guarantor Subsidiaries			Eliminations			Consolidated Total
ASSETS
Current assets:
Cash and cash equivalents	$	2,028		$	2,404		$	—		$	4,432
Trade and other receivables		1,225			4,660			—			5,885
Inventories		3,058			2,087			—			5,145
Prepaid rent		1,047			1,831			—			2,878
Prepaid expenses and other current assets		2,421			4,540			—			6,961
Deferred income taxes		2,766			2,018			—			4,784

Total current assets		12,545			17,540			—			30,085
Property and equipment, net		61,838			205,634			(55,519	)		211,953
Franchise rights, net		78,469			—			—			78,469
Goodwill		1,450			123,484			—			124,934
Intangible assets, net		—			742			—			742
Franchise agreements, net		5,657			—			—			5,657
Intercompany receivable (payable)		171,485			(171,972	)		487			—
Investment in subsidiaries		43,786			—			(43,786	)		—
Deferred income taxes		3,617			8,358			(1,639	)		10,336
Other assets		7,015			6,113			(1,723	)		11,405

Total assets	$	385,862		$	189,899		$	(102,180	)	$	473,581

LIABILITIES AND STOCKHOLDER’S EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt	$	6,075		$	42		$	—		$	6,117
Accounts payable		10,441			10,767			—			21,208
Accrued interest		7,844			—			—			7,844
Accrued payroll, related taxes and benefits		8,708			7,587			—			16,295
Accrued income taxes payable		1,964			—						1,964
Accrued real estate taxes		892			2,715			—			3,607
Other liabilities		7,081			4,529			—			11,610

Total current liabilities		43,005			25,640			—			68,645
Long-term debt, net of current portion		301,694			1,018			—			302,712
Lease financing obligations		7,581			110,462			(70,728	)		47,315
Deferred income—sale-leaseback of real estate		18,380			5,500			7,851			31,731
Accrued postretirement benefits		2,886			—			—			2,886
Other liabilities		13,433			7,406			570			21,409

Total liabilities		386,979			150,026			(62,307	)		474,698
Commitments and contingencies
Stockholder’s equity (deficit)		(1,117	)		39,873			(39,873	)		(1,117	)

Total liabilities and stockholder’s equity (deficit)	$	385,862		$	189,899		$	(102,180	)	$	473,581

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

CONSOLIDATING BALANCE SHEET

December 31, 2007

(In thousands of dollars)

(Unaudited)


	Parent Company Only			Guarantor Subsidiaries			Eliminations			Consolidated Total
ASSETS
Current assets:
Cash and cash equivalents	$	4,912		$	2,484		$	—		$	7,396
Trade and other receivables		1,239			3,495			—			4,734
Inventories		3,243			2,096			—			5,339
Prepaid rent		1,036			1,767			—			2,803
Prepaid expenses and other current assets		2,458			3,714			—			6,172
Deferred income taxes		2,789			2,013			—			4,802

Total current assets		15,677			15,569			—			31,246
Property and equipment, net		60,874			193,636			(54,185	)		200,325
Franchise rights, net		80,052			—			—			80,052
Goodwill		1,450			123,484			—			124,934
Intangible assets, net		—			887			—			887
Franchise agreements, net		5,548			—			—			5,548
Intercompany receivable (payable)		166,701			(167,258	)		557			—
Investment in subsidiaries		39,080			—			(39,080	)		—
Deferred income taxes		3,845			7,961			(1,247	)		10,559
Other assets		7,345			6,373			(1,711	)		12,007

Total assets	$	380,572		$	180,652		$	(95,666	)	$	465,558

LIABILITIES AND STOCKHOLDER’S EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt	$	3,080		$	49		$	—		$	3,129
Accounts payable		10,436			9,618			—			20,054
Accrued interest		8,148			—			—			8,148
Accrued payroll, related taxes and benefits		10,966			7,703			—			18,669
Accrued income taxes payable		933			—			—			933
Accrued real estate taxes		744			2,568			—			3,312
Other liabilities		7,138			2,975			—			10,113

Total current liabilities		41,445			22,913			—			64,358
Long-term debt, net of current portion		297,117			1,037						298,154
Lease financing obligations		13,065			108,089			(68,465	)		52,689
Deferred income—sale-leaseback of real estate		17,713			5,650			7,985			31,348
Accrued postretirement benefits		3,022			—			—			3,022
Other liabilities		15,007			7,313			464			22,784

Total liabilities		387,369			145,002			(60,016	)		472,355
Commitments and contingencies
Stockholder’s equity (deficit)		(6,797	)		35,650			(35,650	)		(6,797	)

Total liabilities and stockholder’s equity (deficit)	$	380,572		$	180,652		$	(95,666	)	$	465,558

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

CONSOLIDATING STATEMENT OF OPERATIONS

Three Months Ended June 30, 2008

(In thousands of dollars)

(Unaudited)


	Parent Company Only			Guarantor Subsidiaries			Eliminations			Consolidated Total
Revenues:
Restaurant sales	$	101,842		$	108,489		$	—		$	210,331
Franchise royalty revenues and fees		—			351			—			351

Total revenues		101,842			108,840			—			210,682

Costs and expenses:
Cost of sales		29,091			34,852			—			63,943
Restaurant wages and related expenses (including stock-based compensation expense of $57)		31,247			29,516			—			60,763
Restaurant rent expense		6,074			4,113			1,381			11,568
Other restaurant operating expenses		15,027			16,321			—			31,348
Advertising expense		4,834			4,390			—			9,224
General and administrative (including stock based compensation expense of $435)		6,996			6,720			—			13,716
Depreciation and amortization		3,843			4,559			(325	)		8,077
Impairment losses		71			10			—			81
Other income		—			(119	)		—			(119	)

Total operating expenses		97,183			100,362			1,056			198,601

Income from operations		4,659			8,478			(1,056	)		12,081
Interest expense		6,061			2,596			(1,534	)		7,123
Gain on extinguishment of debt		(180	)		—			—			(180	)
Intercompany interest allocations		(4,557	)		4,557			—			—

Income before income taxes		3,335			1,325			478			5,138
Provision for income taxes		1,165			436			279			1,880
Equity income from subsidiaries		1,088			—			(1,088	)		—

Net income	$	3,258		$	889		$	(889	)	$	3,258

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

CONSOLIDATING STATEMENT OF OPERATIONS

Three Months Ended June 30, 2007

(In thousands of dollars)

(Unaudited)


	Parent Company Only			Guarantor Subsidiaries		Eliminations			Consolidated Total
Revenues:
Restaurant sales	$	96,928		$	103,189	$	—		$	200,117
Franchise royalty revenues and fees		—			332		—			332

Total revenues		96,928			103,521		—			200,449

Costs and expenses:
Cost of sales		25,515			31,860		—			57,375
Restaurant wages and related expenses (including stock-based compensation expense of $39)		30,483			28,079		—			58,562
Restaurant rent expense		5,914			3,685		1,308			10,907
Other restaurant operating expenses		14,337			14,197		—			28,534
Advertising expense		4,559			3,890		—			8,449
General and administrative (including stock based compensation expense of $315)		6,867			6,437		—			13,304
Depreciation and amortization		3,944			4,251		(308	)		7,887
Impairment losses		14			55		—			69
Other income		—			—		—			—

Total operating expenses		91,633			92,454		1,000			185,087

Income from operations		5,295			11,067		(1,000	)		15,362
Interest expense		6,540			2,515		(1,454	)		7,601
Intercompany interest allocations		(4,556	)		4,556		—			—

Income before income taxes		3,311			3,996		454			7,761
Provision for income taxes		1,095			1,389		178			2,662
Equity income from subsidiaries		2,883			—		(2,883	)		—

Net income	$	5,099		$	2,607	$	(2,607	)	$	5,099

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

CONSOLIDATING STATEMENT OF OPERATIONS

Six Months Ended June 30, 2008

(In thousands of dollars)

(Unaudited)


	Parent Company Only			Guarantor Subsidiaries			Eliminations			Consolidated Total
Revenues:
Restaurant sales	$	193,006		$	212,718		$	—		$	405,724
Franchise royalty revenues and fees		—			711			—			711

Total revenues		193,006			213,429			—			406,435

Costs and expenses:
Cost of sales		53,543			68,029			—			121,572
Restaurant wages and related expenses (including stock-based compensation expense of $114)		60,815			58,489			—			119,304
Restaurant rent expense		12,100			8,215			2,736			23,051
Other restaurant operating expenses		29,576			31,317			—			60,893
Advertising expense		8,807			8,241			—			17,048
General and administrative (including stock based compensation expense of $852)		13,469			13,240			—			26,709
Depreciation and amortization		7,727			9,014			(642	)		16,099
Impairment loss		92			10			—			102
Other income		—			(119	)		—			(119	)

Total operating expenses		186,129			196,436			2,094			384,659

Income from operations		6,877			16,993			(2,094	)		21,776
Interest expense		12,434			5,163			(3,040	)		14,557
Gain on extinguishment of debt		(180	)		—			—			(180	)
Intercompany interest allocations		(9,113	)		9,113			—			—

Income before income taxes		3,736			2,717			946			7,399
Provision for income taxes		1,277			954			462			2,693
Equity income from subsidiaries		2,247			—			(2,247	)		—

Net income	$	4,706		$	1,763		$	(1,763	)	$	4,706

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

CONSOLIDATING STATEMENT OF OPERATIONS

Six Months Ended June 30, 2007

(In thousands of dollars)

(Unaudited)


	Parent Company Only			Guarantor Subsidiaries			Eliminations			Consolidated Total
Revenues:
Restaurant sales	$	185,398		$	202,585		$	—		$	387,983
Franchise royalty revenues and fees		—			669			—			669

Total revenues		185,398			203,254			—			388,652

Costs and expenses:
Cost of sales		47,702			61,967			—			109,669
Restaurant wages and related expenses (including stock-based compensation expense of $76)		59,620			54,890			—			114,510
Restaurant rent expense		11,781			7,209			2,596			21,586
Other restaurant operating expenses		28,310			28,171			—			56,481
Advertising expense		8,610			8,374			—			16,984
General and administrative (including stock-based compensation expense of $633)		13,584			12,864			—			26,448
Depreciation and amortization		7,944			8,247			(613	)		15,578
Impairment losses		14			55			—			69
Other income		—			(347	)		—			(347	)

Total operating expenses		177,565			181,430			1,983			360,978

Income from operations		7,833			21,824			(1,983	)		27,674
Interest expense		13,817			5,027			(2,887	)		15,957
Loss on extinguishment of debt		1,485			—			—			1,485
Intercompany interest allocations		(9,112	)		9,112			—			—

Income before income taxes		1,643			7,685			904			10,232
Provision for income taxes		507			2,760			287			3,554
Equity income from subsidiaries		5,542			—			(5,542	)		—

Net income	$	6,678		$	4,925		$	(4,925	)	$	6,678

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

CONSOLIDATING STATEMENT OF CASH FLOWS

Six Months Ended June 30, 2008

(In thousands of dollars)

(Unaudited)


	Parent Company Only			Guarantor Subsidiaries			Eliminations			Consolidated Total
Cash flows provided from (used for) operating activities:
Net income	$	4,706		$	1,763		$	(1,763	)	$	4,706
Adjustments to reconcile net income to net cash provided from (used for) operating activities:
Loss (gain) on disposals of property and equipment		51			(63	)		—			(12	)
Stock-based compensation expense		779			187			—			966
Depreciation and amortization		7,727			9,014			(642	)		16,099
Amortization of deferred financing costs		567			105			(77	)		595
Amortization of unearned purchase discounts		(1,077	)		—			—			(1,077	)
Amortization of deferred gains from sale-leaseback transactions		(653	)		(133	)		(258	)		(1,044	)
Impairment losses		92			10			—			102
Loss on settlements of lease financing obligations		31			—			—			31
Accretion of interest on lease financing obligations		10			110			—			120
Accrued income taxes		1,031			—			—			1,031
Deferred income taxes		259			(402	)		392			249
Gain on extinguishment of debt		(180	)		—						(180	)
Changes in other operating assets and liabilities		(13,828	)		9,274			2,348			(2,206	)

Net cash provided from (used for) operating activities		(485	)		19,865			—			19,380

Cash flows used for investing activities:
Capital expenditures:
New restaurant development		(1,067	)		(15,318	)		—			(16,385	)
Restaurant remodeling		(3,532	)		(2,636	)		—			(6,168	)
Other restaurant capital expenditures		(1,597	)		(2,494	)		—			(4,091	)
Corporate and restaurant information systems		(895	)		(1,690	)		—			(2,585	)

Total capital expenditures		(7,091	)		(22,138	)		—			(29,229	)
Proceeds from sale-leaseback transactions		2,557			—			2,100			4,657
Proceeds from sales of other properties		—			119			—			119

Net cash used for investing activities		(4,534	)		(22,019	)		2,100			(24,453	)

Cash flows provided from financing activities:
Borrowings on revolving credit facility		62,400			—			—			62,400
Repayments on revolving credit facility		(52,900	)		—			—			(52,900	)
Principal payments on capital leases		(45	)		(26	)		—			(71	)
Repurchase of senior subordinated notes		(1,820	)		—			—			(1,820	)
Financing costs associated with issuance of debt		—			(88	)		88			—
Proceeds from lease financing obligations		—			2,188			(2,188	)		—
Settlement of lease financing obligations		(5,500	)		—			—			(5,500	)

Net cash provided from financing activities		2,135			2,074			(2,100	)		2,109

Net decrease in cash and cash equivalents		(2,884	)		(80	)		—			(2,964	)
Cash and cash equivalents, beginning of period		4,912			2,484			—			7,396

Cash and cash equivalents, end of period	$	2,028		$	2,404		$	—		$	4,432

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

CONSOLIDATING STATEMENT OF CASH FLOWS

Six Months Ended June 30, 2007

(In thousands of dollars)

(Unaudited)


	Parent Company Only			Guarantor Subsidiaries			Eliminations			Consolidated Total
Cash flows provided from operating activities:
Net income	$	6,678		$	4,925		$	(4,925	)	$	6,678
Adjustments to reconcile net income to net cash provided from operating activities:
Loss (gain) on disposals of property and equipment		133			(24	)		—			109
Stock-based compensation expense		530			179			—			709
Depreciation and amortization		7,944			8,247			(613	)		15,578
Amortization of deferred financing costs		608			104			(74	)		638
Amortization of unearned purchase discounts		(1,078	)		—			—			(1,078	)
Amortization of deferred gains from sale-leaseback transactions		(593	)		(127	)		(249	)		(969	)
Impairment losses		14			55			—			69
Gain on settlements of lease financing obligations		(163	)		—			—			(163	)
Accretion of interest on lease financing obligations		33			229			—			262
Deferred income taxes		(210	)		(323	)		323			(210	)
Loss on extinguishment of debt		1,485			—			—			1,485
Changes in other operating assets and liabilities		(5,561	)		6,502			5,538			6,479

Net cash provided from operating activities		9,820			19,767			—			29,587

Cash flows used for investing activities:
Capital expenditures:
New restaurant development		(911	)		(17,809	)		—			(18,720	)
Restaurant remodeling		(2,160	)		(1,084	)		—			(3,244	)
Other restaurant capital expenditures		(1,880	)		(2,390	)		—			(4,270	)
Corporate and restaurant information systems		(1,386	)		(107	)		—			(1,493	)

Total capital expenditures		(6,337	)		(21,390	)		—			(27,727	)
Properties purchased for sale-leaseback		—			(2,461	)		—			(2,461	)
Proceeds from sale-leaseback transactions		—			661			1,812			2,473
Proceeds from sales of other properties		—			979			—			979

Net cash used for investing activities		(6,337	)		(22,211	)		1,812			(26,736	)

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		11,600			—			—			11,600
Repayments on revolving credit facility		(11,600	)		—			—			(11,600	)
Proceeds from new senior credit facility		120,000			—			—			120,000
Principal payments on capital leases		(46	)		(159	)		—			(205	)
Expenses from initial public offering		(21	)		—			—			(21	)
Financing costs associated with issuance of debt		(1,228	)		(13	)		13			(1,228	)
Proceeds from lease financing obligations		—			1,825			(1,825	)		—
Settlement of lease financing obligations		(4,412	)		—			—			(4,412	)

Net cash provided from (used for) financing activities		(4,107	)		1,653			(1,812	)		(4,266	)

Net decrease in cash and cash equivalents		(624	)		(791	)		—			(1,415	)
Cash and cash equivalents, beginning of period		1,182			2,757			—			3,939

Cash and cash equivalents, end of period	$	558		$	1,966		$	—		$	2,524

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