Edgar Filing: CARROLS CORP

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

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

For the quarterly period ended October 3, 2010

¨	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 have submitted electronically and posted on their Corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ 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	¨	Smaller reporting company	¨

Carrols Corporation

Large accelerated filer	¨	Accelerated filer	¨

Non-accelerated filer	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 November 5, 2010, Carrols Restaurant Group, Inc. had 21,624,732 shares of its common stock, $.01 par value, outstanding. As of November 5, 2010, 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. AND CARROLS CORPORATION

FORM 10-Q

QUARTER ENDED OCTOBER 3, 2010


		Page

PART I FINANCIAL INFORMATION

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

	Consolidated Balance Sheets as of September 30, 2010 and December 31, 2009		3

	Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2010 and 2009		4

	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2010 and 2009		5

	Notes to Consolidated Financial Statements		6

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

	Consolidated Balance Sheets as of September 30, 2010 and December 31, 2009		16

	Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2010 and 2009		17

	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2010 and 2009		18

	Notes to Consolidated Financial Statements		19

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations		38

Item 3	Quantitative and Qualitative Disclosures About Market Risk		50

Item 4	Controls and Procedures		50

PART II OTHER INFORMATION

Item 1	Legal Proceedings		51

Item 1A	Risk Factors		51

Item 2	Unregistered Sales of Equity Securities and Use of Proceeds		51

Item 3	Default Upon Senior Securities		51

Item 4	Reserved		51

Item 5	Other Information		51

Item 6	Exhibits		51

PART I—FINANCIAL INFORMATION

ITEM 1—INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

CARROLS RESTAURANT GROUP, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

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

(Unaudited)


	September 30, 2010			December 31, 2009
ASSETS
Current assets:
Cash and cash equivalents	$	3,257		$	4,402
Trade and other receivables		6,872			5,971
Inventories		4,988			5,935
Prepaid rent		3,956			3,928
Prepaid expenses and other current assets		5,847			4,835
Refundable income taxes		—			1,185
Deferred income taxes		4,834			4,834

Total current assets		29,754			31,090
Property and equipment, net		191,892			192,724
Franchise rights, net (Note 4)		71,276			73,674
Goodwill (Note 4)		124,934			124,934
Intangible assets, net		447			543
Franchise agreements, at cost less accumulated amortization of $6,011 and $5,854, respectively		5,675			5,924
Deferred income taxes		1,687			1,935
Other assets		8,540			9,153

Total assets	$	434,205		$	439,977

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt (Note 5)	$	14,918		$	12,985
Accounts payable		14,875			15,983
Accrued interest		3,160			6,880
Accrued payroll, related taxes and benefits		17,252			21,454
Accrued income taxes payable		430			—
Accrued real estate taxes		4,663			4,780
Other liabilities		10,836			9,061

Total current liabilities		66,134			71,143
Long-term debt, net of current portion (Note 5)		250,568			260,108
Lease financing obligations (Note 9)		10,046			9,999
Deferred income—sale-leaseback of real estate		41,224			43,088
Accrued postretirement benefits (Note 8)		1,704			1,914
Other liabilities (Note 7)		22,508			22,321

Total liabilities		392,184			408,573
Commitments and contingencies (Note 11)

Stockholders’ equity:
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 - 21,623,798 and 21,611,607 shares, respectively		216			216
Additional paid-in capital		3,024			1,759
Retained earnings		37,249			27,907
Accumulated other comprehensive income (Note 13)		1,673			1,663
Treasury stock, at cost		(141	)		(141	)

Total stockholders’ equity		42,021			31,404

Total liabilities and stockholders’ equity	$	434,205		$	439,977

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

CARROLS RESTAURANT GROUP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009

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

(Unaudited)


	Three months ended September 30,						Nine months ended September 30,
	2010			2009			2010			2009
Revenues:
Restaurant sales	$	201,272		$	200,802		$	600,080		$	605,326
Franchise royalty revenues and fees		353			364			1,165			1,117

Total revenues		201,625			201,166			601,245			606,443


Costs and expenses:
Cost of sales		60,093			57,662			182,260			175,284
Restaurant wages and related expenses (including stock-based compensation expense of $21, $51, $49 and $156, respectively)		59,027			59,109			177,772			176,896
Restaurant rent expense		12,035			12,383			36,623			37,217
Other restaurant operating expenses		29,649			29,841			86,986			88,541
Advertising expense		8,856			7,974			23,460			23,552
General and administrative (including stock-based compensation epense of $402, $296, $1,183 and $899, respectively)		12,022			12,766			37,196			38,682
Depreciation and amortization		8,080			8,080			24,315			23,833
Impairment and other lease charges (Note 3)		191			46			4,092			400
Other income (Note 14)		(400	)		(220	)		(400	)		(799	)

Total operating expenses		189,553			187,641			572,304			563,606

Income from operations		12,072			13,525			28,941			42,837
Interest expense		4,693			4,834			14,144			14,908

Income before income taxes		7,379			8,691			14,797			27,929
Provision for income taxes (Note 6)		2,786			3,094			5,455			10,241

Net income	$	4,593		$	5,597		$	9,342		$	17,688

Basic net income per share (Note 12)	$	0.21		$	0.26		$	0.43		$	0.82

Diluted net income per share (Note 12)	$	0.21		$	0.26		$	0.43		$	0.81

Basic weighted average common shares outstanding (Note 12)		21,623,221			21,593,927			21,618,624			21,592,974
Diluted weighted average common shares outstanding (Note 12)		21,777,325			21,844,946			21,819,696			21,740,957

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

CARROLS RESTAURANT GROUP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009

(In thousands of dollars)

(Unaudited)


	2010			2009
Cash flows provided from operating activities:
Net income	$	9,342		$	17,688
Adjustments to reconcile net income to net cash provided from operating activities:
Loss on disposals of property and equipment		525			15
Stock-based compensation expense		1,232			1,055
Impairment and other lease charges		4,092			400
Depreciation and amortization		24,315			23,833
Amortization of deferred financing costs		713			732
Amortization of unearned purchase discounts		—			(1,616	)
Amortization of deferred gains from sale-leaseback transactions		(2,510	)		(2,363	)
Gain on settlements of lease financing obligations		—			(76	)
Accretion of interest on lease financing obligations		47			33
Deferred income taxes		248			1,299
Accrued income taxes		1,615			902
Changes in other operating assets and liabilities		(8,985	)		5,039

Net cash provided from operating activities		30,634			46,941

Cash flows used for investing activities:
Capital expenditures:
New restaurant development		(9,783	)		(7,887	)
Restaurant remodeling		(8,572	)		(10,073	)
Other restaurant capital expenditures		(6,995	)		(8,367	)
Corporate and restaurant information systems		(962	)		(3,624	)

Total capital expenditures		(26,312	)		(29,951	)
Properties purchased for sale-leaseback		(3,695	)		(1,260	)
Proceeds from sale-leaseback transactions		5,891			5,454
Proceeds from sales of other properties		—			819

Net cash used for investing activities		(24,116	)		(24,938	)

Cash flows used for financing activities:
Borrowings on revolving credit facility		96,300			77,700
Repayments on revolving credit facility		(94,000	)		(92,600	)
Principal pre-payments on term loans		(1,023	)		—
Scheduled principal payments on term loans		(8,912	)		(6,000	)
Principal payments on capital leases		(61	)		(82	)
Proceeds from lease financing obligations		—			835
Settlement of lease financing obligations		—			(1,945	)
Financing costs associated with issuance of lease financing obligations		—			(4	)
Proceeds from stock option exercises		33			—

Net cash used for financing activities		(7,663	)		(22,096	)

Net decrease in cash and cash equivalents		(1,145	)		(93	)
Cash and cash equivalents, beginning of period		4,402			3,399

Cash and cash equivalents, end of period	$	3,257		$	3,306

Supplemental disclosures:
Interest paid on long-term debt	$	16,419		$	17,803
Interest paid on lease financing obligations	$	685		$	926
Accruals for capital expenditures	$	530		$	318
Income taxes paid, net	$	3,564		$	8,040
Capital lease obligations incurred	$	123		$	—
Non-cash reduction of assets under lease financing obligations due to lease amendments	$	—		$	2,074
Non-cash reduction of lease financing obligations due to lease amendments	$	—		$	2,833

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

Business Description. At October 3, 2010, the Company operated, as franchisee, 306 quick-service restaurants under the trade name “Burger King” in 12 Northeastern, Midwestern and Southeastern states. At October 3, 2010, the Company also owned and operated 90 Pollo Tropical restaurants, of which 85 were located in Florida, four were in New Jersey and one was in Connecticut, and franchised a total of 29 Pollo Tropical restaurants, 21 in Puerto Rico, two in Ecuador, one in Honduras, one in the Bahamas, one in Trinidad and three on college campuses in Florida. At October 3, 2010, the Company owned and operated 156 Taco Cabana restaurants located primarily in Texas and franchised two Taco Cabana restaurants in New Mexico, one in Texas and one in Georgia.

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’ equity.

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 January 3, 2010 and December 28, 2008 will be referred to as the fiscal years ended December 31, 2009 and 2008, respectively. Similarly, all references herein to the three and nine months ended October 3, 2010 and September 27, 2009 will be referred to as the three and nine months ended September 30, 2010 and September 30, 2009, respectively. The year ended December 31, 2009 contained 53 weeks. The three and nine months ended September 30, 2010 and 2009 each contained thirteen and thirty-nine weeks, respectively.

Basis of Presentation. The accompanying unaudited consolidated financial statements for the three and nine months ended September 30, 2010 and 2009 have been prepared without an audit pursuant to the rules and regulations of the Securities and Exchange Commission and do not include certain of the information and the footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all normal and recurring adjustments considered necessary for a fair presentation of such financial statements have been included. The results of operations for the three and nine months ended September 30, 2010 and 2009 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, 2009 contained in the Company’s 2009 Annual Report on Form 10-K. The December 31, 2009 balance sheet data is derived from those audited financial statements.

Fair Value of Financial Instruments. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. In determining fair value, the accounting standards establish a three level hierarchy for inputs used in measuring fair value as follows: Level 1 inputs are quoted prices in active markets for identical assets or liabilities; Level 2 inputs are observable for the asset or liability, either directly or indirectly, including quoted prices in active markets for similar assets or liabilities; and Level 3 inputs are unobservable and reflect our own assumptions. The following methods were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate the fair value:

•

Current Assets and Liabilities. The carrying value of cash and accrued liabilities approximates fair value because of the short maturity of those instruments.

•

Senior Subordinated Notes. The fair values of outstanding senior subordinated notes are based on quoted market prices. The fair values at September 30, 2010 and December 31, 2009 were approximately $166.2 million and $167.5 million, respectively.

•

Revolving and Term Loan Facilities. Rates and terms under Carrols’ senior credit facility are favorable to debt with similar terms and maturities that could be obtained, if at all, at September 30, 2010. Given the lack of comparative information regarding such debt, including the lack of trading in Carrols’ Term A debt, it is not practicable to estimate the fair value of our existing borrowings under Carrols’ senior credit facility at September 30, 2010.

CARROLS RESTAURANT GROUP, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

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 and assumptions, include: accrued occupancy costs, insurance liabilities, income taxes, evaluation for impairment of goodwill, long-lived assets and Burger King franchise rights and lease accounting matters. Actual results could differ from those estimates.

Subsequent Events. The Company evaluated for subsequent events through the issuance date of the Company’s financial statements. No subsequent events requiring disclosure were noted.

2. Stock-Based Compensation

Stock-based compensation expense for the three and nine months ended September 30, 2010 was $0.4 million and $1.2 million, respectively. As of September 30, 2010, the total non-vested stock-based compensation expense relating to the options and restricted shares was approximately $3.0 million and the Company expects to record an additional $0.4 million as compensation expense in 2010. At September 30, 2010, the remaining weighted average vesting period for stock options and restricted shares was 3.1 years and 1.5 years, respectively.

Stock Options

A summary of all option activity for the nine months ended September 30, 2010 was as follows:


	Number of Options			Weighted Average Exercise Price		Average Remaining Contractual Life		Aggregate Intrinsic Value (1)
Options outstanding at January 1, 2010		2,130,758		$	9.86		4.8	$	2,340
Granted		552,000			6.41
Exercised		(10,838	)		2.77
Forfeited		(59,766	)		9.67

Options outstanding at September 30, 2010		2,612,154		$	9.16		4.5	$	1,379

Vested or expected to vest at September 30, 2010		2,580,161		$	9.19		4.5	$	1,356

Options exercisable at September 30, 2010		1,214,954		$	11.36		3.7	$	440

(1)	The aggregate intrinsic value was calculated using the difference between the market price of the Company’s common stock at October 3, 2010 of $5.42 and the grant price for only those awards that had a grant price that was less than the market price of the Company’s common stock at October 3, 2010.

3. Impairment of Long-Lived Assets and Other Lease Charges

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 the undiscounted future cash flows over the life of the primary asset for each restaurant 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 and 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 plus any lease liabilities to be incurred for non-operating properties, net of any estimated sublease recoveries.

CARROLS RESTAURANT GROUP, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

The Company determined the fair value of the impaired long-lived assets at the restaurant level based on current economic conditions and historical experience. These fair value asset measurements rely on significant unobservable inputs and are considered Level 3 in the fair value hierarchy. The non-financial assets measured at fair value associated with impairment charges recorded in 2010 totaled $1.5 million and consist of restaurant equipment, which will be used in other Company restaurants and whose value was determined based upon the Company’s experience of amounts utilized from prior restaurant closures, and an owned restaurant property valued based on recent property sales in that restaurant’s trade area.

Impairment and other lease charges recorded on long-lived assets for the Company’s segments were as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2010		2009		2010		2009
Burger King	$	98	$	31	$	379	$	59
Pollo Tropical		86		—		2,069		284
Taco Cabana		7		15		1,644		57

	$	191	$	46	$	4,092	$	400

During the nine months ended September 30, 2010, the Company recorded impairment and other lease charges of $4.1 million which included $1.4 million for an underperforming Pollo Tropical restaurant and $0.3 million to reduce the fair market value of a previously impaired Pollo Tropical restaurant. In addition, the Company recorded charges of $1.1 million for an underperforming Taco Cabana restaurant, $0.3 million to reduce the fair market value of a previously impaired Taco Cabana restaurant and $0.4 million associated with underperforming Burger King restaurants.

During the nine months ended September 30, 2009, the Company closed one Pollo Tropical restaurant property in Florida whose fixed assets were impaired in 2008, and recorded a charge of $0.3 million which principally consisted of future minimum lease payments and related ancillary costs from the date of the closure to the end of the remaining lease term, net of any estimated cost recoveries from subletting the property.

4. Goodwill and Franchise Rights

Goodwill. The Company is required to review goodwill for impairment annually, or more frequently when events and circumstances indicate that the carrying amount may be impaired. If the determined fair value of goodwill is less than the related carrying amount, an impairment loss is recognized. 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, September 30, 2010	$	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 plus one twenty-year renewal period.

The Company assesses the potential impairment of Burger King franchise rights whenever events or changes in circumstances indicate that the carrying value may not be recoverable. If an indicator of potential impairment exists, an estimate of the aggregate undiscounted 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 Burger King franchise rights determined to be impaired during the three and nine months ended September 30, 2010 and 2009.

CARROLS RESTAURANT GROUP, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

Amortization expense related to Burger King franchise rights was $799 and $784 for the three months ended September 30, 2010 and 2009, respectively, and $2,398 and $2,352 for the nine months ended September 30, 2010 and 2009, respectively. The Company estimates the amortization expense for the year ending December 31, 2010 and for each of the five succeeding years to be $3,197.

5. Long-term Debt

Long-term debt at September 30, 2010 and December 31, 2009 consisted of the following:


	September 30, 2010			December 31, 2009
Collateralized:
Senior Credit Facility-Revolving credit facility	$	4,200		$	1,900
Senior Credit Facility-Term loan A facility		95,065			105,000

Unsecured:
9% Senior Subordinated Notes		165,000			165,000
Capital leases		1,221			1,193

		265,486			273,093
Less: current portion		(14,918	)		(12,985	)

	$	250,568		$	260,108

Senior Credit Facility. 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’ senior credit facility initially totaled approximately $185 million, consisting of $120 million principal amount of term loan A borrowings maturing on March 9, 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 credit 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 9, 2012.

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 percentage ranging from 0% to 0.25% based on Carrols’ senior leverage ratio (as defined in the 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. At October 3, 2010 the LIBOR margin percentage was 1.0%.

During the nine months ended September 30, 2010, Carrols made a required prepayment of approximately $1.0 million based on 25% of Carrols’ Excess Cash Flow for the year ended December 31, 2009, as defined. At October 3, 2010, outstanding borrowings under Term loan A were $95.1 million with the remaining balance due and payable as follows:

1) two quarterly installments of approximately $3.0 million beginning on December 31, 2010;

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

3) four quarterly installments of approximately $17.8 million beginning on June 30, 2012.

After reserving $14.5 million for letters of credit guaranteed by the facility, $46.3 million was available for borrowings under the revolving credit facility at October 3, 2010.

Under the senior credit facility, Carrols is also required to make mandatory prepayments of principal on its term loan borrowings (a) annually in an amount up to 50% of Excess Cash Flow depending upon Carrols’ Total Leverage Ratio (as such terms are defined in the 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. The senior credit facility contains customary default provisions as provided therein, including without limitation, a cross default provision pursuant to which it is an event of default under the senior credit facility if there is a default in the payment of any principal of or interest on any indebtedness of Carrols having an outstanding principal amount of at least $2.5 million (excluding lease financing obligations but which would include the Indenture governing the Notes, as defined below) or any event or condition which results in the acceleration of such indebtedness prior to its stated maturity.

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 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 October 3, 2010.

Senior Subordinated Notes. On December 15, 2004, Carrols issued $180 million of 9% Senior Subordinated Notes due 2013 (the “Notes”). The notes bear interest at a rate of 9% payable semi-annually on January 15 and July 15 and mature on January 15, 2013. At both October 3, 2010 and January 3, 2010, $165.0 million principal amount of the Notes were outstanding.

Restrictive covenants under the Indenture governing the 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. Carrols was in compliance with the restrictive covenants in the Indenture governing the Notes as of October 3, 2010.

The Indenture governing the Notes contains customary default provisions as provided therein, including without limitation, a cross default provision pursuant to which it is an event of default under the Notes and the Indenture if there is a default under any indebtedness of Carrols having an outstanding principal amount of $20 million or more (which would include the senior credit facility) if such default results in the acceleration of such indebtedness prior to its stated maturity or is caused by a failure to pay principal when due.

6. Income Taxes

The provision for income taxes for the three and nine months ended September 30, 2010 and 2009 was comprised of the following:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2010		2009		2010		2009
Current	$	2,620	$	2,562	$	5,207	$	8,942
Deferred		166		532		248		1,299

	$	2,786	$	3,094	$	5,455	$	10,241

The provision for income taxes for the three and nine months ended September 30, 2010 was derived using an estimated effective annual income tax rate for 2010 of 36.6%, which excludes any discrete tax adjustments. Discrete tax adjustments increased the provision for income taxes by $108 and $38 in the three and nine months ended September 30, 2010, respectively.

The provision for income taxes for the three and nine months ended September 30, 2009 was derived using an estimated effective annual income tax rate for 2009 of 37.3%, which excludes any discrete tax adjustments. Discrete tax adjustments reduced the provision for income taxes by $130 and $187 in the three and nine months ended September 30, 2009, respectively.

The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. As of September 30, 2010 and December 31, 2009, the Company had no unrecognized tax benefits and no accrued interest related to uncertain tax positions.

The tax years 2007-2009 remain open to examination by the major taxing jurisdictions to which the Company is subject. Although it is not reasonably possible to estimate the amount by which unrecognized tax benefits may increase within the next twelve months due to the uncertainties regarding the timing of any examinations, the Company does not expect unrecognized tax benefits to significantly change in 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 September 30, 2010 and December 31, 2009 consisted of the following:


	September 30,		December 31,
	2010		2009
Accrued occupancy costs	$	12,555	$	11,572
Accrued workers’ compensation costs		3,576		4,018
Deferred compensation		2,845		3,210
Other		3,532		3,521

	$	22,508	$	22,321

8. Postretirement Benefits

The Company provides postretirement medical and life insurance benefits covering Burger King administrative and restaurant management salaried employees who retire or terminate that qualify for such benefits. A December 31 measurement date is used for postretirement benefits.

The following summarizes the components of net periodic postretirement benefit income:


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2010			2009			2010			2009
Service cost	$	8		$	6		$	23		$	21
Interest cost		27			30			81			84
Amortization of net gains and losses		24			27			73			69
Amortization of prior service credit		(90	)		(93	)		(270	)		(265	)

Net periodic postretirement benefit income	$	(31	)	$	(30	)	$	(93	)	$	(91	)

During the nine months ended September 30, 2010, the Company made contributions of $107 to its postretirement plan and expects to make additional contributions during 2010. Contributions made by the Company to its postretirement plan for the year ended December 31, 2009 were $153.

9. Lease Financing Obligations

The Company has previously entered into sale-leaseback transactions involving certain restaurant properties that did not qualify for sale-leaseback accounting and as a result, were classified as financing transactions. 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.

During 2009, the Company settled $1.9 million of lease financing obligations which included a purchase from a lessor of one restaurant property previously subject to a lease financing obligation for $1.1 million and the settlement of a lease financing obligation incurred previously in 2009 for $0.8 million. The Company also modified provisions of three of its restaurant leases previously accounted for as lease financing obligations which allowed the respective sale transactions to qualify for sale-leaseback accounting. As a result of these transactions in 2009, lease financing obligations were reduced $4.9 million, assets under lease financing obligations were reduced by $2.7 million and deferred gains on qualified sale-leaseback transactions of $1.2 million were recorded.

Interest expense associated with lease financing obligations, including settlement gains and losses, for the three months ended September 30, 2010 and 2009 was $0.2 million and $0.3 million, respectively, and for the nine months ended September 30, 2010 and 2009 was $0.7 million and $0.9 million, respectively.

CARROLS RESTAURANT GROUP, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

10. 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. Pollo Tropical is a quick-casual restaurant chain offering a unique selection of food items reflecting tropical and Caribbean influences and features grilled marinated chicken and authentic “made from scratch” side dishes. 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.

The accounting policies of each segment are the same as those described in the summary of significant accounting policies included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009. The following table includes Adjusted 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. Adjusted Segment EBITDA is defined as earnings attributable to the applicable segment before interest, income taxes, depreciation and amortization, impairment losses and other lease charges, stock-based compensation expense, other income and gains and losses 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
September 30, 2010:
Total revenues	$	47,567	$	63,702	$	90,356	$	—	$	201,625
Cost of sales		15,020		18,939		26,134		—		60,093
Restaurant wages and related expenses		11,417		19,390		28,199		21		59,027
General and administrative expenses (1)		3,195		2,287		6,138		402		12,022
Depreciation and amortization		2,004		2,226		3,394		456		8,080
Adjusted Segment EBITDA		7,489		6,483		6,394
Capital expenditures, including acquisitions		3,842		3,395		2,658		252		10,147

September 30, 2009:
Total revenues	$	44,021	$	63,013	$	94,132	$	—	$	201,166
Cost of sales		14,379		18,074		25,209		—		57,662
Restaurant wages and related expenses		10,689		19,030		29,339		51		59,109
General and administrative expenses (1)		2,771		2,877		6,822		296		12,766
Depreciation and amortization		2,014		2,249		3,407		410		8,080
Adjusted Segment EBITDA		6,294		6,662		8,822
Capital expenditures, including acquisitions		697		2,924		8,475		547		12,643

Nine Months Ended
September 30, 2010:
Total revenues	$	139,873	$	189,941	$	271,431	$	—	$	601,245
Cost of sales		44,880		56,644		80,736		—		182,260
Restaurant wages and related expenses		34,241		58,041		85,441		49		177,772
General and administrative expenses (1)		8,862		7,881		19,270		1,183		37,196
Depreciation and amortization		5,876		6,744		10,344		1,351		24,315
Adjusted Segment EBITDA		22,361		20,117		15,702
Capital expenditures, including acquisitions		7,667		8,261		9,422		962		26,312

September 30, 2009:
Total revenues	$	132,737	$	189,543	$	284,163	$	—	$	606,443
Cost of sales		43,585		54,960		76,739		—		175,284
Restaurant wages and related expenses		32,553		56,029		88,158		156		176,896
General and administrative expenses (1)		7,572		8,729		21,482		899		38,682
Depreciation and amortization		5,936		6,708		10,056		1,133		23,833
Adjusted Segment EBITDA		19,526		22,906		24,894
Capital expenditures, including acquisitions		1,901		9,503		14,923		3,624		29,951

Identifiable Assets:
At September 30, 2010	$	52,698	$	64,942	$	145,146	$	171,419	$	434,205
At December 31, 2009		52,802		67,342		146,679		173,154		439,977

(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 Adjusted Segment EBITDA to consolidated net income is as follows:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
Adjusted Segment EBITDA:
Pollo Tropical	$	7,489		$	6,294		$	22,361		$	19,526
Taco Cabana		6,483			6,662			20,117			22,906
Burger King		6,394			8,822			15,702			24,894

Less:
Depreciation and amortization		8,080			8,080			24,315			23,833
Impairment and other lease charges		191			46			4,092			400
Interest expense		4,693			4,834			14,144			14,908
Provision for income taxes		2,786			3,094			5,455			10,241
Stock-based compensation expense		423			347			1,232			1,055
Other income		(400	)		(220	)		(400	)		(799	)

Net income	$	4,593		$	5,597		$	9,342		$	17,688

11. 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.

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.

12. 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. To the extent such outstanding stock options are antidilutive, they are excluded from the calculation of diluted net income per share.

CARROLS RESTAURANT GROUP, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

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


	Three months ended September 30,				Nine months ended September 30,
	2010		2009		2010		2009
Basic net income per share:
Net income	$	4,593	$	5,597	$	9,342	$	17,688
Weighted average common shares outstanding		21,623,221		21,593,927		21,618,624		21,592,974

Basic net income per share	$	0.21	$	0.26	$	0.43	$	0.82


Diluted net income per share:
Net income for diluted net income per share	$	4,593	$	5,597	$	9,342	$	17,688
Shares used in computed basic net income per share		21,623,221		21,593,927		21,618,624		21,592,974
Dilutive effect of restricted shares and stock options		154,104		251,019		201,072		147,983

Shares used in computed diluted net income per share		21,777,325		21,844,946		21,819,696		21,740,957


Diluted net income per share	$	0.21	$	0.26	$	0.43	$	0.81

Shares excluded from diluted net income per share computation (1)		2,137,039		1,613,242		2,109,818		1,810,089

(1)

These shares were not included in the computation of diluted net income per share because they would have been antidilutive for the periods presented.

13. Comprehensive Income

The items that currently impact the Company’s other comprehensive income are changes in postretirement benefit obligations, net of tax.


	Three months ended September 30,				Nine months ended September 30,
	2010		2009		2010		2009
Net income	$	4,593	$	5,597	$	9,342	$	17,688
Change in postretirement benefit obligation, net of tax		—		—		10		—

Comprehensive income	$	4,593	$	5,597	$	9,352	$	17,688

14. Other Income

During the three months ended September 30, 2010, the Company recorded a gain of $0.4 million related to a property insurance recovery from a fire at a Burger King restaurant. During the three months ended September 30, 2009, the Company recorded a gain of $0.2 million related to the sale of a non-operating property. During the nine months ended September 30, 2009, the Company also recorded a gain of $0.6 million related to an insurance recovery for damages to Taco Cabana restaurants during Hurricane Ike.

15. Recent Accounting Developments

There are currently no recent accounting pronouncements which had or are expected to have a material impact on the Company’s consolidated financial statements as of the date of this report.

ITEM 1—INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

CARROLS CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

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

(Unaudited)


	September 30,			December 31,
	2010			2009
ASSETS
Current assets:
Cash and cash equivalents	$	3,257		$	4,402
Trade and other receivables		6,872			5,971
Inventories		4,988			5,935
Prepaid rent		3,956			3,928
Prepaid expenses and other current assets		5,847			4,835
Refundable income taxes		—			1,185
Deferred income taxes		4,834			4,834

Total current assets		29,754			31,090
Property and equipment, net		191,892			192,724
Franchise rights, net (Note 4)		71,276			73,674
Goodwill (Note 4)		124,934			124,934
Intangible assets, net		447			543
Franchise agreements, at cost less accumulated amortization of $6,011 and $5,854, respectively		5,675			5,924
Deferred income taxes		1,687			1,935
Other assets		8,540			9,153

Total assets	$	434,205		$	439,977

LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current portion of long-term debt (Note 5)	$	14,918		$	12,985
Accounts payable		14,875			15,983
Accrued interest		3,160			6,880
Accrued payroll, related taxes and benefits		17,252			21,454
Accrued income taxes		430			—
Accrued real estate taxes		4,663			4,780
Other liabilities		10,836			9,061

Total current liabilities		66,134			71,143

Long-term debt, net of current portion (Note 5)		250,568			260,108
Lease financing obligations (Note 9)		10,046			9,999
Deferred income—sale-leaseback of real estate		41,224			43,088
Accrued postretirement benefits (Note 8)		1,704			1,914
Other liabilities (Note 7)		22,453			22,271

Total liabilities		392,129			408,523

Commitments and contingencies (Note 11)

Stockholder’s equity:
Common stock, par value $1; authorized 1,000 shares, issued and outstanding—10 shares		—			—
Additional paid-in capital		(4,469	)		(5,734	)
Retained earnings		44,872			35,525
Accumulated other comprehensive income (Note 12)		1,673			1,663

Total stockholder’s equity		42,076			31,454

Total liabilities and stockholder’s equity	$	434,205		$	439,977

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

CARROLS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009

(In thousands of dollars)

(Unaudited)


	Three months ended September 30,						Nine months ended September 30,
	2010			2009			2010			2009
Revenues:
Restaurant sales	$	201,272		$	200,802		$	600,080		$	605,326
Franchise royalty revenues and fees		353			364			1,165			1,117

Total revenues		201,625			201,166			601,245			606,443


Costs and expenses:
Cost of sales		60,093			57,662			182,260			175,284
Restaurant wages and related expenses (including stock-based compensation expense of $21, $51, $49 and $156, respectively)		59,027			59,109			177,772			176,896
Restaurant rent expense		12,035			12,383			36,623			37,217
Other restaurant operating expenses		29,649			29,841			86,986			88,541
Advertising expense		8,856			7,974			23,460			23,552
General and administrative (including stock-based compensation expense of $402, $296, $1,183 and $899, respectively)		12,020			12,764			37,191			38,677
Depreciation and amortization		8,080			8,080			24,315			23,833
Impairment and other lease charges (Note 3)		191			46			4,092			400
Other income (Note 13)		(400	)		(220	)		(400	)		(799	)

Total costs and expenses		189,551			187,639			572,299			563,601

Income from operations		12,074			13,527			28,946			42,842
Interest expense		4,693			4,834			14,144			14,908

Income before income taxes		7,381			8,693			14,802			27,934
Provision for income taxes (Note 6)		2,786			3,094			5,455			10,241

Net income	$	4,595		$	5,599		$	9,347		$	17,693

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

CARROLS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009

(In thousands of dollars)

(Unaudited)


	2010			2009
Cash flows provided from operating activities:
Net income	$	9,347		$	17,693
Adjustments to reconcile net income to net cash provided from operating activities:
Loss on disposals of property and equipment		525			15
Stock-based compensation expense		1,232			1,055
Impairment and other lease charges		4,092			400
Depreciation and amortization		24,315			23,833
Amortization of deferred financing costs		713			732
Amortization of unearned purchase discounts		—			(1,616	)
Amortization of deferred gains from sale-leaseback transactions		(2,510	)		(2,363	)
Gain on settlements of lease financing obligations		—			(76	)
Accretion of interest on lease financing obligations		47			33
Deferred income taxes		248			1,299
Accrued income taxes		1,615			902
Changes in other operating assets and liabilities		(8,990	)		5,034

Net cash provided from operating activities		30,634			46,941

Cash flows used for investing activities:
Capital expenditures:
New restaurant development		(9,783	)		(7,887	)
Restaurant remodeling		(8,572	)		(10,073	)
Other restaurant capital expenditures		(6,995	)		(8,367	)
Corporate and restaurant information systems		(962	)		(3,624	)

Total capital expenditures		(26,312	)		(29,951	)
Properties purchased for sale-leaseback		(3,695	)		(1,260	)
Proceeds from sale-leaseback transactions		5,891			5,454
Proceeds from sales of other properties		—			819

Net cash used for investing activities		(24,116	)		(24,938	)

Cash flows used for financing activities:
Borrowings on revolving credit facility		96,300			77,700
Repayments on revolving credit facility		(94,000	)		(92,600	)
Principal pre-payments on term loans		(1,023	)		—
Scheduled principal payments on term loans		(8,912	)		(6,000	)
Principal payments on capital leases		(61	)		(82	)
Proceeds from lease financing obligations		—			835
Settlement of lease financing obligations		—			(1,945	)
Financing costs associated with issuance of lease financing obligations		—			(4	)
Proceeds from stock option exercises		33			—

Net cash used for financing activities		(7,663	)		(22,096	)

Net decrease in cash and cash equivalents		(1,145	)		(93	)
Cash and cash equivalents, beginning of period		4,402			3,399

Cash and cash equivalents, end of period	$	3,257		$	3,306

Supplemental disclosures:
Interest paid on long-term debt	$	16,419		$	17,803
Interest paid on lease financing obligations	$	685		$	926
Accruals for capital expenditures	$	530		$	318
Income taxes paid, net	$	3,564		$	8,040
Capital lease obligations incurred	$	123		$	—
Non-cash reduction of assets under lease financing obligations due to lease amendments	$	—		$	2,074
Non-cash reduction of lease financing obligations due to lease amendments	$	—		$	2,833

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

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands of dollars, except share 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 equity.

•

Current Assets and Liabilities. The carrying value of cash and accrued liabilities approximates fair value because of the short maturity of those instruments.

•

Revolving and Term Loan Facilities. Rates and terms under the Company’s senior credit facility are favorable to debt with similar terms and maturities that could be obtained, if at all, at September 30, 2010. Given the lack of comparative information regarding such debt, including the lack of trading in our Term A debt, it is not practicable to estimate the fair value of existing borrowings under the Company’s senior credit facility at September 30, 2010.

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. Presentation of earnings per share is required for 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.

Subsequent Events. The Company evaluated for subsequent events through the issuance date of the Company’s financial statements. No subsequent events requiring disclosure were noted.

2. Stock-Based Compensation

Stock based compensation expense for the three and nine months ended September 30, 2010 was $0.4 million and $1.2 million, respectively. As of September 30, 2010, the total non-vested stock-based compensation expense relating to the options and restricted shares was approximately $3.0 million and the Company expects to record an additional $0.4 million as compensation expense in 2010. At September 30, 2010, the remaining weighted average vesting period for stock options and restricted shares was 3.1 years and 1.5 years, respectively.

Stock Options

A summary of all option activity for the nine months ended September 30, 2010 was as follows:


	Number of Options			Weighted Average Exercise Price		Average Remaining Contractual Life		Aggregate Intrinsic Value (1)
Options outstanding at January 1, 2010		2,130,758		$	9.86		4.8	$	2,340
Granted		552,000			6.41
Exercised		(10,838	)		2.77
Forfeited		(59,766	)		9.67

Options outstanding at September 30, 2010		2,612,154		$	9.16		4.5	$	1,379

Vested or expected to vest at September 30, 2010		2,580,161		$	9.19		4.5	$	1,356

Options exercisable at September 30, 2010		1,214,954		$	11.36		3.7	$	440

(1)

The aggregate intrinsic value was calculated using the difference between the market price of Carrols Restaurant Group’s common stock at October 3, 2010 of $5.42 and the grant price for only those awards that had a grant price that was less than the market price of Carrols Restaurant Group’s common stock at October 3, 2010.

3. Impairment of Long-lived Assets and Other Lease Charges

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

Impairment and other lease charges recorded on long-lived assets for the Company’s segments were as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2010		2009		2010		2009
Burger King	$	98	$	31	$	379	$	59
Pollo Tropical		86		—		2,069		284
Taco Cabana		7		15		1,644		57

	$	191	$	46	$	4,092	$	400

4. Goodwill and Franchise Rights

Goodwill balances are summarized below:


	Pollo Tropical		Taco Cabana		Burger King		Total
Balance, September 30, 2010	$	56,307	$	67,177	$	1,450	$	124,934

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

5. Long-term Debt

Long-term debt at September 30, 2010 and December 31, 2009 consisted of the following:


	September 30, 2010			December 31, 2009
Collateralized:
Senior Credit Facility-Revolving credit facility	$	4,200		$	1,900
Senior Credit Facility-Term loan A facility		95,065			105,000

Unsecured:
9% Senior Subordinated Notes		165,000			165,000
Capital leases		1,221			1,193

		265,486			273,093
Less: current portion		(14,918	)		(12,985	)

	$	250,568		$	260,108

Senior Credit Facility. 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 initially totaled approximately $185 million, consisting of $120 million principal amount of term loan A borrowings maturing on March 9, 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 credit 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 9, 2012.

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 percentage ranging from 0% to 0.25% based on the Company’s senior leverage ratio (as defined in the 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 the Company’s senior leverage ratio. At October 3, 2010 the LIBOR margin percentage was 1.0%.

During the nine months ended September 30, 2010, the Company made a required prepayment of approximately $1.0 million based on 25% of the Company’s Excess Cash Flow for the year ended December 31, 2009, as defined. At October 3, 2010, outstanding borrowings under Term loan A were $95.1 million with the remaining balance due and payable as follows:

1) two quarterly installments of approximately $3.0 million beginning on December 31, 2010;

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

3) four quarterly installments of approximately $17.8 million beginning on June 30, 2012.

After reserving $14.5 million for letters of credit guaranteed by the facility, $46.3 million was available for borrowings under the revolving credit facility at October 3, 2010.

Under the senior credit facility, the Company is also required to make mandatory prepayments of principal on its term loan borrowings (a) annually in an amount of up 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. The senior credit facility contains customary default provisions as provided therein, including without limitation, a cross default provision pursuant to which it is an event of default under the senior credit facility if there is a default in the payment of any principal of or interest on any indebtedness of the Company having an outstanding principal amount of at least $2.5 million (excluding lease financing obligations but which would include the Indenture governing the Notes, as defined below) or any event or condition which results in the acceleration of such indebtedness prior to its stated maturity.

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

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 senior credit facility as of October 3, 2010.

Senior Subordinated Notes. On December 15, 2004, the Company issued $180 million of 9% Senior Subordinated Notes due 2013 (the “Notes”). The notes bear interest at a rate of 9% payable semi-annually on January 15 and July 15 and mature on January 15, 2013. At both October 3, 2010 and January 3, 2010, $165.0 million principal amount of the Notes were outstanding.

Restrictive covenants under the Indenture governing the 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. Carrols was in compliance with the restrictive covenants in the Indenture governing the Notes as of October 3, 2010.

The Indenture governing the Notes contains customary default provisions as provided therein, including without limitation, a cross default provision pursuant to which it is an event of default under the Notes and the Indenture if there is a default under any indebtedness of the Company having an outstanding principal amount of $20 million or more (which would include the senior credit facility) if such default results in the acceleration of such indebtedness prior to its stated maturity or is caused by a failure to pay principal when due.

6. Income Taxes

The provision for income taxes for the three and nine months ended September 30, 2010 and 2009 was comprised of the following:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2010		2009		2010		2009
Current	$	2,620	$	2,562	$	5,207	$	8,942
Deferred		166		532		248		1,299

	$	2,786	$	3,094	$	5,455	$	10,241

The provision for income taxes for the three and nine months ended September 30, 2009 was derived using an estimated effective annual income tax rate for 2009 of 37.3%, which excludes any discrete tax adjustments. Discrete tax adjustments reduced the provision for income taxes by $130 and $187 in both the three and nine months ended September 30, 2009.

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 September 30, 2010 and December 31, 2009 consisted of the following:


	September 30, 2010		December 31, 2009
Accrued occupancy costs	$	12,555	$	11,572
Accrued workers’ compensation costs		3,576		4,018
Deferred compensation		2,845		3,210
Other		3,477		3,471

	$	22,453	$	22,271

8. Postretirement Benefits

The following summarizes the components of net periodic postretirement benefit income:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
Service cost	$	8		$	6		$	23		$	21
Interest cost		27			30			81			84
Amortization of net gains and losses		24			27			73			69
Amortization of prior service credit		(90	)		(93	)		(270	)		(265	)

Net periodic postretirement benefit income	$	(31	)	$	(30	)	$	(93	)	$	(91	)

During the three months ended September 30, 2010, the Company made contributions of $107 to its postretirement plan and expects to make additional contributions during 2010. Contributions made by the Company to its postretirement plan for the year ended December 31, 2009 were $153.

9. Lease Financing Obligations

CARROLS CORPORATION AND SUBSIDIARIES

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 September 30, 2010 and 2009 was $0.2 million and $0.3 million, respectively and for the nine months ended September 30, 2010 and 2009 was $0.7 million and $0.9 million, respectively.

10. 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
September 30, 2010:
Total revenues	$	47,567	$	63,702	$	90,356	$	—	$	201,625
Cost of sales		15,020		18,939		26,134		—		60,093
Restaurant wages and related expenses		11,417		19,390		28,199		21		59,027
General and administrative expenses (1)		3,193		2,287		6,138		402		12,020
Depreciation and amortization		2,004		2,226		3,394		456		8,080
Adjusted Segment EBITDA		7,491		6,483		6,394
Capital expenditures, including acquisitions		3,842		3,395		2,658		252		10,147

September 30, 2009:
Total revenues	$	44,021	$	63,013	$	94,132	$	—	$	201,166
Cost of sales		14,379		18,074		25,209		—		57,662
Restaurant wages and related expenses		10,689		19,030		29,339		51		59,109
General and administrative expenses (1)		2,769		2,877		6,822		296		12,764
Depreciation and amortization		2,014		2,249		3,407		410		8,080
Adjusted Segment EBITDA		6,296		6,662		8,822
Capital expenditures, including acquisitions		697		2,924		8,475		547		12,643

Nine Months Ended
September 30, 2010:
Total revenues	$	139,873	$	189,941	$	271,431	$	—	$	601,245
Cost of sales		44,880		56,644		80,736		—		182,260
Restaurant wages and related expenses		34,241		58,041		85,441		49		177,772
General and administrative expenses (1)		8,857		7,881		19,270		1,183		37,191
Depreciation and amortization		5,876		6,744		10,344		1,351		24,315
Adjusted Segment EBITDA		22,366		20,117		15,702
Capital expenditures, including acquisitions		7,667		8,261		9,422		962		26,312

September 30, 2009:
Total revenues	$	132,737	$	189,543	$	284,163	$	—	$	606,443
Cost of sales		43,585		54,960		76,739		—		175,284
Restaurant wages and related expenses		32,553		56,029		88,158		156		176,896
General and administrative expenses (1)		7,567		8,729		21,482		899		38,677
Depreciation and amortization		5,936		6,708		10,056		1,133		23,833
Adjusted Segment EBITDA		19,531		22,906		24,894
Capital expenditures, including acquisitions		1,901		9,503		14,923		3,624		29,951

Identifiable Assets:
At September 30, 2010	$	52,698	$	64,942	$	145,146	$	171,419	$	434,205
At December 31, 2009		52,802		67,342		146,679		173,154		439,977

(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 Adjusted Segment EBITDA to consolidated net income is as follows:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
Adjusted Segment EBITDA:
Pollo Tropical	$	7,491		$	6,296		$	22,366		$	19,531
Taco Cabana		6,483			6,662			20,117			22,906
Burger King		6,394			8,822			15,702			24,894

Less:
Depreciation and amortization		8,080			8,080			24,315			23,833
Impairment and other lease charges		191			46			4,092			400
Interest expense		4,693			4,834			14,144			14,908
Provision for income taxes		2,786			3,094			5,455			10,241
Stock-based compensation expense		423			347			1,232			1,055
Other income		(400	)		(220	)		(400	)		(799	)

Net income	$	4,595		$	5,599		$	9,347		$	17,693

11. 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.

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

12. Comprehensive income

The items that currently impact the Company’s other comprehensive income are changes in the postretirement benefit obligations, net of tax.


	Three months ended September 30,				Nine months ended September 30,
	2010		2009		2010		2009
Net income	$	4,595	$	5,599	$	9,347	$	17,693
Change in postretirement benefit obligation, net of tax		—		—		10		—

Comprehensive income	$	4,595	$	5,599	$	9,357	$	17,693

13. Other Income

14. Recent Accounting Developments

There are currently no recent accounting pronouncements which had or are expected to have a material impact on the Company’s consolidated financial statements as of the date of this report.

15. Guarantor Financial Statements

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

Cabana Beverages, Inc.

Cabana Bevco LLC

Carrols LLC

Carrols Realty Holdings Corp.

Carrols Realty I Corp.

Carrols Realty II Corp.

Carrols J.G. Corp.

Quanta Advertising Corp.

Pollo Franchise, Inc.

Pollo Operations, Inc.

Taco Cabana, Inc.

TP Acquisition Corp.

TC Bevco LLC

T.C. Management, Inc.

TC Lease Holdings III, V and VI, Inc.

Get Real, Inc.

Texas Taco Cabana, L.P.

TPAQ Holding Corporation

The following supplemental financial information sets forth on a consolidating basis, balance sheets as of September 30, 2010 and December 31, 2009 for the Parent Company only, Guarantor Subsidiaries and for the Company and the related statements of operations for the three and nine months ended September 30, 2010 and 2009, and cash flows for the nine months ended September 30, 2010 and 2009.

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

For certain of the Company’s sale-leaseback transactions, the Parent Company has guaranteed on an unsecured basis the rental payments of its subsidiaries. In accordance with ASC 840-40-25-16, “Sale-Leaseback Transactions,” 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

September 30, 2010

(In thousands of dollars)

(Unaudited)


	Parent Company Only			Guarantor Subsidiaries			Eliminations			Consolidated Total
ASSETS
Current assets:
Cash and cash equivalents	$	33		$	3,224		$	—		$	3,257
Trade and other receivables		538			6,334			—			6,872
Inventories		—			4,988			—			4,988
Prepaid rent		5			3,951			—			3,956
Prepaid expenses and other current assets		1,205			4,642			—			5,847
Refundable income taxes		—			—			—			—
Deferred income taxes		88			4,746			—			4,834

Total current assets		1,869			27,885			—			29,754
Property and equipment, net		10,856			267,166			(86,130	)		191,892
Franchise rights, net		—			71,276			—			71,276
Goodwill		—			124,934			—			124,934
Intangible assets, net		—			447			—			447
Franchise agreements, net		—			5,675			—			5,675
Intercompany receivable (payable)		120,334			(150,109	)		29,775			—
Investment in subsidiaries		177,280			—			(177,280	)		—
Deferred income taxes		2,517			3,149			(3,979	)		1,687
Other assets		3,823			6,878			(2,161	)		8,540

Total assets	$	316,679		$	357,301		$	(239,775	)	$	434,205

LIABILITIES AND STOCKHOLDER’S EQUITY
Current liabilities:
Current portion of long-term debt	$	14,854		$	64		$	—		$	14,918
Accounts payable		3,635			11,240			—			14,875
Accrued interest		3,160			—			—			3,160
Accrued payroll, related taxes and benefits		(929	)		18,181			—			17,252
Accrued income taxes payable		430			—			—			430
Accrued real estate taxes		—			4,663			—			4,663
Other liabilities		235			10,601			—			10,836

Total current liabilities		21,385			44,749			—			66,134

Long-term debt, net of current portion		249,411			1,157			—			250,568
Lease financing obligations		—			129,905			(119,859	)		10,046
Deferred income—sale-leaseback of real estate		—			23,800			17,424			41,224
Accrued postretirement benefits		1,704			—			—			1,704
Other liabilities		2,103			18,598			1,752			22,453

Total liabilities		274,603			218,209			(100,683	)		392,129
Commitments and contingencies
Stockholder’s equity		42,076			139,092			(139,092	)		42,076

Total liabilities and stockholder’s equity	$	316,679		$	357,301		$	(239,775	)	$	434,205

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

CONSOLIDATING BALANCE SHEET

December 31, 2009

(In thousands of dollars)

(Unaudited)


	Parent Company Only			Guarantor Subsidiaries			Eliminations			Consolidated Total
ASSETS
Current assets:
Cash and cash equivalents	$	34		$	4,368		$	—		$	4,402
Trade and other receivables		(827	)		6,798			—			5,971
Refundable income taxes		1,185			—			—			1,185
Inventories		—			5,935			—			5,935
Prepaid rent		3			3,925			—			3,928
Prepaid expenses and other current assets		1,106			3,729			—			4,835
Deferred income taxes		88			4,746			—			4,834

Total current assets		1,589			29,501			—			31,090

Property and equipment, net		9,356			268,774			(85,406	)		192,724
Franchise rights, net		—			73,674			—			73,674
Goodwill		—			124,934			—			124,934
Intangible assets, net		—			543			—			543
Franchise agreements, net		—			5,924			—			5,924
Intercompany receivable (payable)		139,010			(168,649	)		29,639			—
Investment in subsidiaries		163,791			—			(163,791	)		—
Deferred income taxes		2,460			2,594			(3,119	)		1,935
Other assets		4,510			6,887			(2,244	)		9,153

Total assets	$	320,716		$	344,182		$	(224,921	)	$	439,977

LIABILITIES AND STOCKHOLDER’S EQUITY
Current liabilities:
Current portion of long-term debt	$	12,906		$	79		$	—		$	12,985
Accounts payable		3,735			12,248			—			15,983
Accrued interest		6,880			—			—			6,880
Accrued payroll, related taxes and benefits		1,889			19,565			—			21,454
Accrued real estate taxes		—			4,780			—			4,780
Other liabilities		255			8,806			—			9,061

Total current liabilities		25,665			45,478			—			71,143

Long-term debt, net of current portion		258,994			1,114			—			260,108
Lease financing obligations		—			127,156			(117,157	)		9,999
Deferred income—sale-leaseback of real estate		—			24,611			18,477			43,088
Accrued postretirement benefits		1,914			—			—			1,914
Other liabilities		2,689			18,271			1,311			22,271

Total liabilities		289,262			216,630			(97,369	)		408,523

Stockholder’s equity		31,454			127,552			(127,552	)		31,454

Total liabilities and stockholder’s equity	$	320,716		$	344,182		$	(224,921	)	$	439,977

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

CONSOLIDATING STATEMENT OF OPERATIONS

Three Months Ended September 30, 2010

(In thousands of dollars)

(Unaudited)


	Parent Company Only			Guarantor Subsidiaries			Eliminations			Consolidated Total
Revenues:
Restaurant sales	$	—		$	201,272		$	—		$	201,272
Franchise royalty revenues and fees		—			353			—			353

Total revenues		—			201,625			—			201,625


Costs and expenses:
Cost of sales		—			60,093			—			60,093
Restaurant wages and related expenses (including stock based compensation expense of $21)		—			59,027			—			59,027
Restaurant rent expense		—			9,690			2,345			12,035
Other restaurant operating expenses		—			29,649			—			29,649
Advertising expense		—			8,856			—			8,856
General and administrative (including stock based compensation expense of $402)		1,996			10,024			—			12,020
Depreciation and amortization		—			8,610			(530	)		8,080
Impairment and other lease charges		—			191			—			191
Other income		—			(400	)		—			(400	)

Total costs and expenses		1,996			185,740			1,815			189,551


Income (loss) from operations		(1,996	)		15,885			(1,815	)		12,074
Interest expense		4,406			2,986			(2,699	)		4,693
Intercompany interest allocations		(4,556	)		4,556			—			—


Income (loss) before income taxes		(1,846	)		8,343			884			7,381
Provision (benefit) for income taxes		(433	)		2,954			265			2,786
Equity income from subsidiaries		6,008			—			(6,008	)		—


Net income	$	4,595		$	5,389		$	(5,389	)	$	4,595

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

CONSOLIDATING STATEMENT OF OPERATIONS

Three Months Ended September 30, 2009

(In thousands of dollars)

(Unaudited)


	Parent Company Only			Guarantor Subsidiaries			Eliminations			Consolidated Total
Revenues:
Restaurant sales	$	—		$	200,802		$	—		$	200,802
Franchise royalty revenues and fees		—			364			—			364

Total revenues		—			201,166			—			201,166


Costs and expenses:
Cost of sales		—			57,662			—			57,662
Restaurant wages and related expenses (including stock based compensation expense of $51)		—			59,109			—			59,109
Restaurant rent expense		—			10,120			2,263			12,383
Other restaurant operating expenses		—			29,841			—			29,841
Advertising expense		—			7,974			—			7,974
General and administrative (including stock based compensation expense of $296)		2,210			10,554			—			12,764
Depreciation and amortization		—			8,598			(518	)		8,080
Impairment and other lease charges		—			46			—			46
Other income		—			(220	)		—			(220	)

Total costs and expenses		2,210			183,684			1,745			187,639


Income (loss) from operations		(2,210	)		17,482			(1,745	)		13,527
Interest expense		4,526			2,951			(2,643	)		4,834
Intercompany interest allocations		(4,468	)		4,468			—			—


Income (loss) before income taxes		(2,268	)		10,063			898			8,693
Provision (benefit) for income taxes		(907	)		3,616			385			3,094
Equity income from subsidiaries		6,960			—			(6,960	)		—


Net income	$	5,599		$	6,447		$	(6,447	)	$	5,599

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

CONSOLIDATING STATEMENT OF OPERATIONS

Nine Months Ended September 30, 2010

(In thousands of dollars)

(Unaudited)


	Parent Company Only			Guarantor Subsidiaries			Eliminations			Consolidated Total
Revenues:
Restaurant sales	$	—		$	600,080		$	—		$	600,080
Franchise royalty revenues and fees		—			1,165			—			1,165

Total revenues		—			601,245			—			601,245


Costs and expenses:
Cost of sales		—			182,260			—			182,260
Restaurant wages and related expenses (including stock based compensation expense of $49)		—			177,772			—			177,772
Restaurant rent expense		—			29,636			6,987			36,623
Other restaurant operating expenses		—			86,986			—			86,986
Advertising expense		—			23,460			—			23,460
General and administrative (including stock based compensation expense of $1,183)		6,564			30,627			—			37,191
Depreciation and amortization		—			25,908			(1,593	)		24,315
Impairment and other lease charges		—			4,092			—			4,092
Other income		—			(400	)		—			(400	)

Total costs and expenses		6,564			560,341			5,394			572,299


Income (loss) from operations		(6,564	)		40,904			(5,394	)		28,946
Interest expense		13,286			8,927			(8,069	)		14,144
Intercompany interest allocations		(13,669	)		13,669			—			—


Income (loss) before income taxes		(6,181	)		18,308			2,675			14,802
Provision (benefit) for income taxes		(2,039	)		6,485			1,009			5,455
Equity income from subsidiaries		13,489			—			(13,489	)		—


Net income	$	9,347		$	11,823		$	(11,823	)	$	9,347

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

CONSOLIDATING STATEMENT OF OPERATIONS

Nine Months Ended September 30, 2009

(In thousands of dollars)

(Unaudited)


	Parent Company Only			Guarantor Subsidiaries			Eliminations			Consolidated Total
Revenues:
Restaurant sales	$	—		$	605,326		$	—		$	605,326
Franchise royalty revenues and fees		—			1,117			—			1,117

Total revenues		—			606,443			—			606,443


Costs and expenses:
Cost of sales		—			175,284			—			175,284
Restaurant wages and related expenses (including stock based compensation expense of $156)		—			176,896			—			176,896
Restaurant rent expense		—			30,549			6,668			37,217
Other restaurant operating expenses		—			88,541			—			88,541
Advertising expense		—			23,552			—			23,552
General and administrative (including stock based compensation expense of $899)		6,924			31,753			—			38,677
Depreciation and amortization		—			25,326			(1,493	)		23,833
Impairment and other lease charges		—			400			—			400
Other income		—			(799	)		—			(799	)

Total costs and expenses		6,924			551,502			5,175			563,601


Income (loss) from operations		(6,924	)		54,941			(5,175	)		42,842
Interest expense		13,884			8,689			(7,665	)		14,908

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