---



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549



FORM 10-Q



|x | Quarterly report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934
|- | ----------------------------------------------------------------------------------------



For the quarterly period ended June 30, 2004



or



| ̈ | Transition report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934
|- | -----------------------------------------------------------------------------------------



Commission File Number

0-25629



CARROLS CORPORATION

(Exact name of registrant as specified in its charter)



|                                                               |  |                                        
|-------------------------------------------------------------- |  | ---------------------------------------
|Delaware                                                       |  | 16-0958146                             
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification Number)



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



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



Indicate by check
mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ̈



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



The number of shares of the registrants common stock outstanding as of August 9, 2004 is 10.



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PART I - FINANCIAL INFORMATION



ITEM 1  FINANCIAL STATEMENTS



CARROLS CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands of dollars)



|                                                                                                     |  |              |         |                  |   |        
|---------------------------------------------------------------------------------------------------- |  | ------------ | ------- | ---------------- | - | -------
|                                                                                                     |  | June 30,2004 |         | December 31,2003
|                                                                                                     |  | (unaudited)  |         |                 
|ASSETS                                                                                               |  |              |         |                  |   |        
|Current assets:                                                                                      |  |              |         |                  |   |        
|Cash and cash equivalents                                                                            |  | $            | 3,326   |                  | $ | 2,414  
|Trade and other receivables, net                                                                     |  |              | 2,017   |                  |   | 1,280  
|Inventories                                                                                          |  |              | 5,158   |                  |   | 4,936  
|Prepaid rent                                                                                         |  |              | 2,681   |                  |   | 2,534  
|Prepaid expenses and other current assets                                                            |  |              | 4,015   |                  |   | 4,043  
|Deferred income taxes                                                                                |  |              | 6,286   |                  |   | 6,286  
|                                                                                                     |  |              |         |                  |   |        
|Total current assets                                                                                 |  |              | 23,483  |                  |   | 21,493 
|                                                                                                     |  |              |         |                  |   |        
|Property and equipment, at cost less accumulated depreciation of $214,730 and $194,652, respectively |  |              | 215,982 |                  |   | 236,353
|Franchise rights, at cost less accumulated amortization of $52,892 and $50,732, respectively         |  |              | 84,024  |                  |   | 86,148 
|Goodwill, at cost less accumulated amortization of $10,053 at both dates                             |  |              | 123,861 |                  |   | 123,861
|Deferred income taxes                                                                                |  |              | 8,728   |                  |   | 8,619  
|Other assets                                                                                         |  |              | 11,528  |                  |   | 10,400 
|                                                                                                     |  |              |         |                  |   |        
|Total assets                                                                                         |  | $            | 467,606 |                  | $ | 486,874
|                                                                                                     |  |              |         |                  |   |        



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



2



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CARROLS CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (continued)

(in thousands of dollars)



|                                                                                        |  |              |         |                  |   |         |  
|--------------------------------------------------------------------------------------- |  | ------------ | ------- | ---------------- | - | ------- | -
|                                                                                        |  | June 30,2004 |         | December 31,2003 |  
|                                                                                        |  | (unaudited)  |         |                  |  
|LIABILITIES and STOCKHOLDERS EQUITY                                                    |  |              |         |                  |   |         |  
|Current liabilities:                                                                    |  |              |         |                  |   |         |  
|Accounts payable                                                                        |  | $            | 18,120  |                  | $ | 17,230  |  
|Accrued interest                                                                        |  |              | 1,373   |                  |   | 1,549   |  
|Accrued payroll, related taxes and benefits                                             |  |              | 14,322  |                  |   | 11,545  |  
|Accrued income taxes                                                                    |  |              | 1,565   |                  |   | 836     |  
|Other liabilities                                                                       |  |              | 16,581  |                  |   | 14,897  |  
|Current portion of long-term debt                                                       |  |              | 13,885  |                  |   | 14,005  |  
|Current portion of lease financing obligations                                          |  |              | 2,456   |                  |   | 2,288   |  
|                                                                                        |  |              |         |                  |   |         |  
|Total current liabilities                                                               |  |              | 68,302  |                  |   | 62,350  |  
|Long-term debt, net of current portion                                                  |  |              | 251,579 |                  |   | 281,827 |  
|Lease financing obligations, net of current portion                                     |  |              | 81,129  |                  |   | 82,397  |  
|Deferred income  sale/leaseback of real estate                                         |  |              | 10,371  |                  |   | 8,841   |  
|Accrued postretirement benefits                                                         |  |              | 3,249   |                  |   | 2,962   |  
|Other liabilities (Note 5)                                                              |  |              | 27,574  |                  |   | 27,527  |  
|                                                                                        |  |              |         |                  |   |         |  
|Total liabilities                                                                       |  |              | 442,204 |                  |   | 465,904 |  
|Stockholders equity:                                                                   |  |              |         |                  |   |         |  
|Common stock, par value $1; authorized 1,000 shares, issued and outstanding  10 shares |  |              |        |                  |   |        |  
|Additional paid-in capital                                                              |  |              | 24,485  |                  |   | 24,485  |  
|Accumulated deficit                                                                     |  |              | 917     |                  |   | (3,515  | )
|                                                                                        |  |              |         |                  |   |         |  
|Total stockholders equity                                                              |  |              | 25,402  |                  |   | 20,970  |  
|                                                                                        |  |              |         |                  |   |         |  
|Total liabilities and stockholders equity                                              |  | $            | 467,606 |                  | $ | 486,874 |  
|                                                                                        |  |              |         |                  |   |         |  



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



3



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CARROLS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

THREE MONTHS ENDED JUNE 30, 2004 AND
2003

(in thousands of dollars)



|                                      |  |             |         |                       |   |        
|------------------------------------- |  | ----------- | ------- | --------------------- | - | -------
|                                      |  | 2004        |         | Restated(Note 2) 2003
|                                      |  | (unaudited)
|Revenues:                             |  |             |         |                       |   |        
|Restaurant sales                      |  | $           | 177,522 |                       | $ | 165,263
|Franchise royalty revenues and fees   |  |             | 401     |                       |   | 358    
|                                      |  |             |         |                       |   |        
|Total revenues                        |  |             | 177,923 |                       |   | 165,621
|Costs and expenses:                   |  |             |         |                       |   |        
|Cost of sales                         |  |             | 52,320  |                       |   | 45,385 
|Restaurant wages and related expenses |  |             | 51,671  |                       |   | 49,780 
|Restaurant rent expense               |  |             | 8,723   |                       |   | 7,532  
|Other restaurant operating expenses   |  |             | 22,859  |                       |   | 22,449 
|Advertising expense                   |  |             | 7,046   |                       |   | 7,736  
|General and administrative            |  |             | 10,487  |                       |   | 8,938  
|Depreciation and amortization         |  |             | 10,795  |                       |   | 10,977 
|Impairment losses (Note 3)            |  |             | 308     |                       |   | 607    
|                                      |  |             |         |                       |   |        
|Total operating expenses              |  |             | 164,209 |                       |   | 153,404
|                                      |  |             |         |                       |   |        
|Income from operations                |  |             | 13,714  |                       |   | 12,217 
|Interest expense                      |  |             | 7,324   |                       |   | 8,287  
|                                      |  |             |         |                       |   |        
|Income before income taxes            |  |             | 6,390   |                       |   | 3,930  
|Provision for income taxes (Note 4)   |  |             | 2,337   |                       |   | 1,607  
|                                      |  |             |         |                       |   |        
|Net income                            |  | $           | 4,053   |                       | $ | 2,323  
|                                      |  |             |         |                       |   |        



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



4



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CARROLS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

SIX MONTHS ENDED JUNE 30, 2004 AND 2003

(in thousands of dollars)



|                                      |  |             |         |                        |   |        
|------------------------------------- |  | ----------- | ------- | ---------------------- | - | -------
|                                      |  | 2004        |         | Restated (Note 2) 2003
|                                      |  | (unaudited)
|Revenues:                             |  |             |         |                        |   |        
|Restaurant sales                      |  | $           | 334,067 |                        | $ | 317,165
|Franchise royalty revenues and fees   |  |             | 756     |                        |   | 696    
|                                      |  |             |         |                        |   |        
|Total revenues                        |  |             | 334,823 |                        |   | 317,861
|Costs and expenses:                   |  |             |         |                        |   |        
|Cost of sales                         |  |             | 96,001  |                        |   | 87,819 
|Restaurant wages and related expenses |  |             | 99,522  |                        |   | 96,824 
|Restaurant rent expense               |  |             | 17,287  |                        |   | 15,350 
|Other restaurant operating expenses   |  |             | 44,749  |                        |   | 43,812 
|Advertising expense                   |  |             | 12,873  |                        |   | 15,005 
|General and administrative            |  |             | 20,246  |                        |   | 18,212 
|Depreciation and amortization         |  |             | 21,686  |                        |   | 21,824 
|Impairment losses (Note 3)            |  |             | 569     |                        |   | 645    
|                                      |  |             |         |                        |   |        
|Total operating expenses              |  |             | 312,933 |                        |   | 299,491
|                                      |  |             |         |                        |   |        
|Income from operations                |  |             | 21,890  |                        |   | 18,370 
|Interest expense                      |  |             | 14,901  |                        |   | 16,643 
|                                      |  |             |         |                        |   |        
|Income before income taxes            |  |             | 6,989   |                        |   | 1,727  
|Provision for income taxes (Note 4)   |  |             | 2,557   |                        |   | 744    
|                                      |  |             |         |                        |   |        
|Net income                            |  | $           | 4,432   |                        | $ | 983    
|                                      |  |             |         |                        |   |        



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



5



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CARROLS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

SIX MONTHS ENDED JUNE 30, 2004 AND 2003

(in thousands of dollars)



|                                                                                    |  |             |         |   |                        |   |         |  
|----------------------------------------------------------------------------------- |  | ----------- | ------- | - | ---------------------- | - | ------- | -
|                                                                                    |  | 2004        |         |   | Restated (Note 2) 2003 |  
|                                                                                    |  | (unaudited) |        
|Cash flows provided from operating activities:                                      |  |             |         |   |                        |   |         |  
|Net income                                                                          |  | $           | 4,432   |   |                        | $ | 983     |  
|Adjustments to reconcile net income to net cash provided from operating activities: |  |             |         |   |                        |   |         |  
|Gain on sales of properties                                                         |  |             | (288    | ) |                        |   |        |  
|Depreciation and amortization                                                       |  |             | 21,686  |   |                        |   | 21,824  |  
|Impairment losses                                                                   |  |             | 569     |   |                        |   | 645     |  
|Deferred income taxes                                                               |  |             | (109    | ) |                        |   | 248     |  
|Change in operating assets and liabilities                                          |  |             | 2,318   |   |                        |   | (1,966  | )
|                                                                                    |  |             |         |   |                        |   |         |  
|Net cash provided from operating activities                                         |  |             | 28,608  |   |                        |   | 21,734  |  
|                                                                                    |  |             |         |   |                        |   |         |  
|Cash flows used for investing activities:                                           |  |             |         |   |                        |   |         |  
|Capital expenditures:                                                               |  |             |         |   |                        |   |         |  
|New restaurant development                                                          |  |             | (3,517  | ) |                        |   | (12,170 | )
|Restaurant remodeling                                                               |  |             | (479    | ) |                        |   | (2,549  | )
|Other restaurant expenditures                                                       |  |             | (2,693  | ) |                        |   | (3,822  | )
|Corporate and restaurant information systems                                        |  |             | (362    | ) |                        |   | (976    | )
|                                                                                    |  |             |         |   |                        |   |         |  
|Total capital expenditures                                                          |  |             | (7,051  | ) |                        |   | (19,517 | )
|Properties purchased for sale-leaseback                                             |  |             | (924    | ) |                        |   |        |  
|Proceeds from sales of other properties                                             |  |             | 488     |   |                        |   | 2,670   |  
|                                                                                    |  |             |         |   |                        |   |         |  
|Net cash used for investing activities                                              |  |             | (7,487  | ) |                        |   | (16,847 | )
|                                                                                    |  |             |         |   |                        |   |         |  
|Cash flows used for financing activities:                                           |  |             |         |   |                        |   |         |  
|Borrowings (payments) on revolving credit facility, net                             |  |             | 700     |   |                        |   | (19,800 | )
|Principal payments on term loans                                                    |  |             | (6,750  | ) |                        |   | (2,750  | )
|Principal pre-payments on term loans                                                |  |             | (24,000 | ) |                        |   |        |  
|Principal payments on lease financing obligations                                   |  |             | (1,101  | ) |                        |   | (986    | )
|Payments on other notes payable                                                     |  |             | (117    | ) |                        |   | (519    | )
|Principal payments on capital leases                                                |  |             | (201    | ) |                        |   | (244    | )
|Proceeds from sale-leaseback transactions                                           |  |             | 11,260  |   |                        |   | 19,439  |  
|                                                                                    |  |             |         |   |                        |   |         |  
|Net cash used for financing activities                                              |  |             | (20,209 | ) |                        |   | (4,860  | )
|                                                                                    |  |             |         |   |                        |   |         |  
|Increase in cash and cash equivalents                                               |  |             | 912     |   |                        |   | 27      |  
|Cash and cash equivalents, beginning of period                                      |  |             | 2,414   |   |                        |   | 2,538   |  
|                                                                                    |  |             |         |   |                        |   |         |  
|Cash and cash equivalents, end of period                                            |  | $           | 3,326   |   |                        | $ | 2,565   |  
|                                                                                    |  |             |         |   |                        |   |         |  



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



6



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CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands of
dollars)



|1. | Statement of Management
|-- | -----------------------



The accompanying unaudited consolidated financial statements for the three and six months ended June 30, 2004 and 2003 have been prepared without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission and do not include all of the information and the footnotes required by accounting principles generally accepted in the United States of America for complete statements.
In the opinion of management, all normal and recurring adjustments necessary for a fair presentation of such financial statements have been included.



The results of operations for the three and six months ended June 30, 2004 and 2003 are not necessarily indicative of the results to be expected for the
full year.



The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.



The consolidated financial statements include the accounts of Carrols Corporation and its majority owned subsidiaries
(Carrols or the Company). All material intercompany balances, transactions and profits have been eliminated.



These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended
December 31, 2003 contained in the Companys 2003 Annual Report on Form 10-K. The December 31, 2003 balance sheet data is derived from those audited financial statements. As further discussed in Note 2 the Company restated its financial
statements including applicable footnotes in its 2003 Annual Report on Form 10-K for periods ended prior to December 31, 2003. All previously reported amounts affected by the restatement that appear elsewhere in these footnotes to the consolidated
financial statements have also been restated.



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



7



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CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(in
thousands of dollars)



|2. | Restatement of Previously Issued Financial Statements
|-- | -----------------------------------------------------



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



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



|                                                  |  |                                  |         |                                |   |                                |  |   |            |   |  |   |         |  
|------------------------------------------------- |  | -------------------------------- | ------- | ------------------------------ | - | ------------------------------ |  | - | ---------- | - |  | - | ------- | -
|                                                  |  | Three Months Ended June 30, 2003 |         | Six Months Ended June 30, 2003 |  
|                                                  |  | AsPreviously Reported            |         | AsRestated                     |   | AsPreviouslyReported           |  |   | AsRestated |  
|Consolidated Statement of Operations:             |  |                                  |         |                                |   |                                |  |   |            |   |  |   |         |  
|Restaurant rent expense                           |  | $                                | 9,786   |                                | $ | 7,532                          |  | $ | 19,857     |   |  | $ | 15,350  |  
|Depreciation and amortization                     |  |                                  | 9,859   |                                |   | 10,977                         |  |   | 19,588     |   |  |   | 21,824  |  
|Total operating expenses                          |  |                                  | 154,540 |                                |   | 153,404                        |  |   | 301,762    |   |  |   | 299,491 |  
|Income from operations                            |  |                                  | 11,081  |                                |   | 12,217                         |  |   | 16,099     |   |  |   | 18,370  |  
|Interest expense                                  |  |                                  | 6,467   |                                |   | 8,287                          |  |   | 12,992     |   |  |   | 16,643  |  
|Income before income taxes                        |  |                                  | 4,614   |                                |   | 3,930                          |  |   | 3,107      |   |  |   | 1,727   |  
|Provision for income taxes                        |  |                                  | 1,893   |                                |   | 1,607                          |  |   | 1,321      |   |  |   | 744     |  
|Net income                                        |  |                                  | 2,721   |                                |   | 2,323                          |  |   | 1,786      |   |  |   | 983     |  
|                                                  |  |                                  |        
|                                                  |  |                                  |         |                                |   | Six Months Ended June 30, 2003 | 
|                                                  |  |                                  |         |                                |   | AsPreviouslyReported           |  |   | AsRestated |  
|Consolidated Statement of Cash Flows:             |  |                                  |         |                                |   |                                |  |   |            |   |  |   |         |  
|Net income                                        |  |                                  |         |                                |   |                                |  | $ | 1,786      |   |  | $ | 983     |  
|Depreciation and amortization                     |  |                                  |         |                                |   |                                |  |   | 19,588     |   |  |   | 21,824  |  
|Deferred income taxes                             |  |                                  |         |                                |   |                                |  |   | 825        |   |  |   | 248     |  
|Other changes in operating assets and liabilities |  |                                  |         |                                |   |                                |  |   | (2,096     | ) |  |   | (1,966  | )
|Net cash provided from operating activities       |  |                                  |         |                                |   |                                |  |   | 20,748     |   |  |   | 21,734  |  
|Principal payments on lease financing obligations |  |                                  |         |                                |   |                                |  |   |           |   |  |   | (986    | )
|Net cash used for financing activities            |  |                                  |         |                                |   |                                |  |   | (3,874     | ) |  |   | (4,860  | )



8



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CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(in
thousands of dollars)



|3. | Impairment of Long-Lived Assets
|-- | -------------------------------



The Company reviews its long-lived assets for impairment at the restaurant level on an ongoing basis. If an indicator of impairment exists for any of its
restaurants, an estimate of undiscounted future cash flows produced by each restaurant is compared to that restaurants carrying value. If an asset is determined to be impaired, an impairment charge is measured by the excess of the carrying
amount of the asset over its fair value. The Company recorded impairment charges for its segments as follows:



|            |  |                            |     |                           |   |      |  |      |     |  |   |    
|----------- |  | -------------------------- | --- | ------------------------- | - | ---- |  | ---- | --- |  | - | ---
|            |  | Three MonthsEnded June 30, |     | Six Months Ended June 30,
|            |  | 2004                       |     | 2003                      |   | 2004 |  | 2003
|Burger King |  | $                          | 308 |                           | $ | 387  |  | $    | 569 |  | $ | 425
|Taco Cabana |  |                            |    |                           |   | 220  |  |      |    |  |   | 220
|            |  |                            |     |                           |   |      |  |      |     |  |   |    
|            |  | $                          | 308 |                           | $ | 607  |  | $    | 569 |  | $ | 645
|            |  |                            |     |                           |   |      |  |      |     |  |   |    



|4. | Income Taxes
|-- | ------------



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



|         |  |      |       |   |                           |   |    
|-------- |  | ---- | ----- | - | ------------------------- | - | ---
|         |  | 2004 |       |   | 2003 As Restated (Note 2)
|Current  |  | $    | 2,666 |   |                           | $ | 496
|Deferred |  |      | (109  | ) |                           |   | 248
|         |  |      |       |   |                           |   |    
|         |  | $    | 2,557 |   |                           | $ | 744
|         |  |      |       |   |                           |   |    



The difference
between the expected tax benefit, resulting from application of the federal statutory income tax rate to pretax income, and the reported income tax provision results principally from state taxes and non-deductible amortization of certain franchise
rights.



9



---

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(in
thousands of dollars)



|5. | Other Liabilities
|-- | -----------------



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



|                                   |  |               |        |                   |   |       
|---------------------------------- |  | ------------- | ------ | ----------------- | - | ------
|                                   |  | June 30, 2004 |        | December 31, 2003
|Unearned purchase discounts        |  | $             | 9,751  |                   | $ | 10,888
|Accrued occupancy costs            |  |               | 8,273  |                   |   | 8,012 
|Accrued workers compensation costs |  |               | 4,371  |                   |   | 3,848 
|Other                              |  |               | 5,179  |                   |   | 4,779 
|                                   |  |               |        |                   |   |       
|                                   |  | $             | 27,574 |                   | $ | 27,527
|                                   |  |               |        |                   |   |       



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



Statement of Financial Accounting Standards (SFAS) 123, Accounting for Stock-Based Compensation,
(SFAS 123), as amended by FAS 148, permits entities to recognize as an expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS 123 allows entities to continue to apply the provisions of APB
25 and provide pro forma net income disclosures for employee stock option grants as if the fair-value-based method defined in SFAS 123 has been applied. The Company has elected to continue applying the provisions of APB 25 and provide the pro forma
disclosure provisions of SFAS 123. Had compensation cost been determined based upon the fair value of the stock options at grant date consistent with the method of SFAS 123, the Companys pro-forma net income would have been $4,280 and $840 for
the six months ended June 30, 2004 and 2003, respectively.



|7. | Postretirement Benefits
|-- | -----------------------



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



|                                                |  |      |     |   |      |   |     |  
|----------------------------------------------- |  | ---- | --- | - | ---- | - | --- | -
|                                                |  | 2004 |     |   | 2003 |  
|Components of net periodic benefit cost:        |  |      |     |   |      |   |     |  
|Service cost                                    |  | $    | 172 |   |      | $ | 144 |  
|Interest cost                                   |  |      | 135 |   |      |   | 116 |  
|Amortization of gains and losses                |  |      | 31  |   |      |   | 18  |  
|Amortization of unrecognized prior service cost |  |      | (15 | ) |      |   | (15 | )
|                                                |  |      |     |   |      |   |     |  
|Net periodic postretirement benefit cost        |  | $    | 323 |   |      | $ | 263 |  
|                                                |  |      |     |   |      |   |     |  



10



---

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(in
thousands of dollars)



|8. | Business Segment Information
|-- | ----------------------------



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



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



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



11



---

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(in
thousands of dollars)



|                                                                                   |  |                            |        |                          |   |            |  |       |         |  |              |         |   |  |   |        
|---------------------------------------------------------------------------------- |  | -------------------------- | ------ | ------------------------ | - | ---------- |  | ----- | ------- |  | ------------ | ------- | - |  | - | -------
|                                                                                   |  | TacoCabana                 |        | PolloTropical            |   | BurgerKing |  | Other |         |  | Consolidated
|Three Months Ended:                                                                |  |                            |        |                          |   |            |  |       |         |  |              |         |   |  |   |        
|June 30, 2004:                                                                     |  |                            |        |                          |   |            |  |       |         |  |              |         |   |  |   |        
|Revenues                                                                           |  | $                          | 51,612 |                          | $ | 31,014     |  | $     | 95,297  |  | $            |        |   |  | $ | 177,923
|Cost of sales                                                                      |  |                            | 15,564 |                          |   | 9,523      |  |       | 27,233  |  |              |        |   |  |   | 52,320 
|Restaurant wages and related expenses                                              |  |                            | 14,553 |                          |   | 7,775      |  |       | 29,343  |  |              |        |   |  |   | 51,671 
|Depreciation and amortization                                                      |  |                            | 2,715  |                          |   | 1,156      |  |       | 5,927   |  |              | 997     |   |  |   | 10,795 
|EBITDA                                                                             |  |                            | 6,705  |                          |   | 7,499      |  |       | 10,613  |  |              |         |   |  |   |        
|Capital expenditures                                                               |  |                            | 1,595  |                          |   | 352        |  |       | 1,804   |  |              | 196     |   |  |   | 3,947  
|June 30, 2003 (as restated):                                                       |  |                            |        |                          |   |            |  |       |         |  |              |         |   |  |   |        
|Revenues                                                                           |  | $                          | 46,796 |                          | $ | 27,042     |  | $     | 91,783  |  | $            |        |   |  | $ | 165,621
|Cost of sales                                                                      |  |                            | 13,703 |                          |   | 8,135      |  |       | 23,547  |  |              |        |   |  |   | 45,385 
|Restaurant wages and related expenses                                              |  |                            | 13,481 |                          |   | 7,192      |  |       | 29,107  |  |              |        |   |  |   | 49,780 
|Depreciation and amortization                                                      |  |                            | 2,152  |                          |   | 1,350      |  |       | 6,407   |  |              | 1,068   |   |  |   | 10,977 
|EBITDA                                                                             |  |                            | 6,892  |                          |   | 5,151      |  |       | 11,758  |  |              |         |   |  |   |        
|Capital expenditures                                                               |  |                            | 5,409  |                          |   | 945        |  |       | 1,929   |  |              | 215     |   |  |   | 8,498  
|Six Months Ended:                                                                  |  |                            |        |                          |   |            |  |       |         |  |              |         |   |  |   |        
|June 30, 2004:                                                                     |  |                            |        |                          |   |            |  |       |         |  |              |         |   |  |   |        
|Revenues                                                                           |  | $                          | 97,759 |                          | $ | 60,638     |  | $     | 176,426 |  | $            |        |   |  | $ | 334,823
|Cost of sales                                                                      |  |                            | 29,221 |                          |   | 18,528     |  |       | 48,252  |  |              |        |   |  |   | 96,001 
|Restaurant wages and related expenses                                              |  |                            | 27,847 |                          |   | 14,885     |  |       | 56,790  |  |              |        |   |  |   | 99,522 
|Depreciation and amortization                                                      |  |                            | 5,430  |                          |   | 2,304      |  |       | 12,059  |  |              | 1,893   |   |  |   | 21,686 
|EBITDA                                                                             |  |                            | 12,998 |                          |   | 14,748     |  |       | 16,399  |  |              |         |   |  |   |        
|Capital expenditures                                                               |  |                            | 3,577  |                          |   | 583        |  |       | 2,529   |  |              | 362     |   |  |   | 7,051  
|June 30, 2003 (as restated):                                                       |  |                            |        |                          |   |            |  |       |         |  |              |         |   |  |   |        
|Revenues                                                                           |  | $                          | 88,362 |                          | $ | 53,774     |  | $     | 175,725 |  | $            |        |   |  | $ | 317,861
|Cost of sales                                                                      |  |                            | 25,764 |                          |   | 16,405     |  |       | 45,650  |  |              |        |   |  |   | 87,819 
|Restaurant wages and related expenses                                              |  |                            | 25,559 |                          |   | 14,016     |  |       | 57,249  |  |              |        |   |  |   | 96,824 
|Depreciation and amortization                                                      |  |                            | 4,401  |                          |   | 2,681      |  |       | 12,651  |  |              | 2,091   |   |  |   | 21,824 
|EBITDA                                                                             |  |                            | 12,202 |                          |   | 10,940     |  |       | 17,697  |  |              |         |   |  |   |        
|Capital expenditures                                                               |  |                            | 9,648  |                          |   | 3,719      |  |       | 5,174   |  |              | 976     |   |  |   | 19,517 
|Identifiable Assets:                                                               |  |                            |        |                          |   |            |  |       |         |  |              |         |   |  |   |        
|At June 30, 2004                                                                   |  | $                          | 65,363 |                          | $ | 42,502     |  | $     | 196,878 |  | $            | 162,863 |   |  | $ | 467,606
|At December 31, 2003                                                               |  |                            | 72,885 |                          |   | 43,612     |  |       | 208,008 |  |              | 162,369 |   |  |   | 486,874
|Year Ended December 31, 2003:                                                      |  |                            |        |                          |   |            |  |       |         |  |              |         |   |  |   |        
|EBITDA                                                                             |  | $                          | 24,411 |                          | $ | 22,553     |  | $     | 36,787  |  |              |         |   |  |   |        
|Year Ended December 31, 2002:                                                      |  |                            |        |                          |   |            |  |       |         |  |              |         |   |  |   |        
|EBITDA                                                                             |  |                            | 28,278 |                          |   | 22,384     |  |       | 43,651  |  |              |         |   |  |   |        
|Year Ended December 31, 2001:                                                      |  |                            |        |                          |   |            |  |       |         |  |              |         |   |  |   |        
|EBITDA                                                                             |  |                            | 24,467 |                          |   | 22,085     |  |       | 43,219  |  |              |         |   |  |   |        
|                                                                                   |  |                            |        |                         
|A reconciliation of our segment's EBITDA to consolidated net income is as follows: |  |                            |        |                          |   |            |  |       |         |  |              |         |  
|                                                                                   |  |                            |       
|                                                                                   |  | Three Months EndedJune 30, |        | Six Months EndedJune 30, |   |            | 
|                                                                                   |  | 2004                       |        | 2003                     |   | 2004       |  | 2003  |         |  |             
|Segment EBITDA:                                                                    |  |                            |        |                          |   |            |  |       |         |  |              |         |   |  |   |        
|Taco Cabana                                                                        |  | $                          | 6,705  |                          | $ | 6,892      |  | $     | 12,998  |  | $            | 12,202  |   |  |   |        
|Pollo Tropical                                                                     |  |                            | 7,499  |                          |   | 5,151      |  |       | 14,748  |  |              | 10,940  |   |  |   |        
|Burger King                                                                        |  |                            | 10,613 |                          |   | 11,758     |  |       | 16,399  |  |              | 17,697  |   |  |   |        
|                                                                                   |  |                            |        |                          |   |            |  |       |         |  |              |         |   |  |   |        
|subtotal                                                                           |  |                            | 24,817 |                          |   | 23,801     |  |       | 44,145  |  |              | 40,839  |   |  |   |        
|                                                                                   |  |                            |        |                          |  
|Less: Depreciation and amortization                                                |  |                            | 10,795 |                          |   | 10,977     |  |       | 21,686  |  |              | 21,824  |   |  |   |        
|Impairment losses                                                                  |  |                            | 308    |                          |   | 607        |  |       | 569     |  |              | 645     |   |  |   |        
|Interest expense                                                                   |  |                            | 7,324  |                          |   | 8,287      |  |       | 14,901  |  |              | 16,643  |   |  |   |        
|Provision for income taxes                                                         |  |                            | 2,337  |                          |   | 1,607      |  |       | 2,557   |  |              | 744     |   |  |   |        
|                                                                                   |  |                            |        |                          |   |            |  |       |         |  |              |         |   |  |   |        
|Net income                                                                         |  | $                          | 4,053  |                          | $ | 2,323      |  | $     | 4,432   |  | $            | 983     |   |  |   |        
|                                                                                   |  |                            |        |                          |   |            |  |       |         |  |              |         |   |  |   |        
|                                                                                   |  |                            |       
|                                                                                   |  |                            |        | Year Ended December 31,  |   |            | 
|                                                                                   |  |                            |        | 2003                     |   | 2002       |  | 2001  |         |  |             
|Segment EBITDA:                                                                    |  |                            |        |                          |   |            |  |       |         |  |              |         |   |  |   |        
|Taco Cabana                                                                        |  |                            |        |                          | $ | 24,411     |  | $     | 28,278  |  | $            | 24,467  |   |  |   |        
|Pollo Tropical                                                                     |  |                            |        |                          |   | 22,553     |  |       | 22,384  |  |              | 22,085  |   |  |   |        
|Burger King                                                                        |  |                            |        |                          |   | 36,787     |  |       | 43,651  |  |              | 43,219  |   |  |   |        
|                                                                                   |  |                            |        |                          |   |            |  |       |         |  |              |         |   |  |   |        
|subtotal                                                                           |  |                            |        |                          |   | 83,751     |  |       | 94,313  |  |              | 89,771  |   |  |   |        
|                                                                                   |  |                            |        |                          |  
|Less: Depreciation and amortization                                                |  |                            |        |                          |   | 43,102     |  |       | 42,766  |  |              | 47,388  |   |  |   |        
|Impairment losses                                                                  |  |                            |        |                          |   | 4,151      |  |       | 1,285   |  |              | 7,631   |   |  |   |        
|Interest expense                                                                   |  |                            |        |                          |   | 32,363     |  |       | 34,955  |  |              | 40,552  |   |  |   |        
|Provision for income taxes                                                         |  |                            |        |                          |   | 1,767      |  |       | 5,593   |  |              | 274     |   |  |   |        
|                                                                                   |  |                            |        |                          |   |            |  |       |         |  |              |         |   |  |   |        
|Net income (loss)                                                                  |  |                            |        |                          | $ | 2,368      |  | $     | 9,714   |  | $            | (6,074  | ) |  |   |        
|                                                                                   |  |                            |        |                          |   |            |  |       |         |  |              |         |   |  |   |        



12



---

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(in
thousands of dollars)



|9. | Guarantor Financial Statements
|-- | ------------------------------



The $170 million senior subordinated notes of the Company are guaranteed by certain of the Companys subsidiaries (Guarantor
Subsidiaries), all of which are wholly-owned by the Company. These subsidiaries are:



Carrols Realty Holdings

Carrols Realty I Corp.

Carrols Realty II Corp.

Carrols J.G. Corp.

Quanta Advertising Corp.

Pollo Franchise, Inc.

Pollo Operations, Inc.

Taco Cabana, Inc.

TP Acquisition Corp.

T.C. Management, Inc.

Taco Cabana
Management, Inc.

Get Real, Inc.

Texas Taco Cabana, L.P.



The following
supplemental financial information includes consolidating balance sheets, statements of operations and statements of cash flows for the Parent Company only, Guarantor Subsidiaries and for the Company as of June 30, 2004 and December 31, 2003 and for
the three and six months ended June 30, 2004 and 2003. Debt and goodwill allocated to subsidiaries are presented on an accounting push-down basis.



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



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



13



---

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

CONSOLIDATING BALANCE SHEET

June 30, 2004

(in thousands of dollars)



|                                                    |  |                    |         |                       |   |          |              |  |   |                |   |  |   |        
|--------------------------------------------------- |  | ------------------ | ------- | --------------------- | - | -------- | ------------ |  | - | -------------- | - |  | - | -------
|                                                    |  | ParentCompany Only |         | GuarantorSubsidiaries |   |          | Eliminations |  |   | Combined Total
|ASSETS                                              |  |                    |         |                       |   |          |              |  |   |                |   |  |   |        
|Current Assets:                                     |  |                    |         |                       |   |          |              |  |   |                |   |  |   |        
|Cash and cash equivalents                           |  | $                  | 803     |                       | $ | 2,523    |              |  | $ |               |   |  | $ | 3,326  
|Trade and other receivables, net                    |  |                    | 479     |                       |   | 1,538    |              |  |   |               |   |  |   | 2,017  
|Inventories                                         |  |                    | 3,597   |                       |   | 1,561    |              |  |   |               |   |  |   | 5,158  
|Prepaid rent                                        |  |                    | 1,328   |                       |   | 1,353    |              |  |   |               |   |  |   | 2,681  
|Prepaid expenses and other current assets           |  |                    | 1,208   |                       |   | 2,807    |              |  |   |               |   |  |   | 4,015  
|Deferred income taxes                               |  |                    | 6,286   |                       |   |         |              |  |   |               |   |  |   | 6,286  
|                                                    |  |                    |         |                       |   |          |              |  |   |                |   |  |   |        
|Total current assets                                |  |                    | 13,701  |                       |   | 9,782    |              |  |   |               |   |  |   | 23,483 
|Property and equipment, net                         |  |                    | 107,466 |                       |   | 135,049  |              |  |   | (26,533        | ) |  |   | 215,982
|Franchise rights, net                               |  |                    | 84,024  |                       |   |         |              |  |   |               |   |  |   | 84,024 
|Goodwill, net                                       |  |                    | 1,449   |                       |   | 122,412  |              |  |   |               |   |  |   | 123,861
|Intercompany receivable (payable)                   |  |                    | 136,777 |                       |   | (136,777 | )            |  |   |               |   |  |   |       
|Investment in subsidiaries                          |  |                    | 18,898  |                       |   |         |              |  |   | (18,898        | ) |  |   |       
|Deferred income taxes                               |  |                    | 8,728   |                       |   |         |              |  |   |               |   |  |   | 8,728  
|Other assets                                        |  |                    | 9,926   |                       |   | 3,011    |              |  |   | (1,409         | ) |  |   | 11,528 
|                                                    |  |                    |         |                       |   |          |              |  |   |                |   |  |   |        
|Total assets                                        |  | $                  | 380,969 |                       | $ | 133,477  |              |  | $ | (46,840        | ) |  | $ | 467,606
|                                                    |  |                    |         |                       |   |          |              |  |   |                |   |  |   |        
|LIABILITIES AND STOCKHOLDERS EQUITY                |  |                    |         |                       |   |          |              |  |   |                |   |  |   |        
|Current Liabilities:                                |  |                    |         |                       |   |          |              |  |   |                |   |  |   |        
|Accounts payable                                    |  | $                  | 11,333  |                       | $ | 6,787    |              |  | $ |               |   |  | $ | 18,120 
|Accrued interest                                    |  |                    | 1,373   |                       |   |         |              |  |   |               |   |  |   | 1,373  
|Accrued payroll, related taxes and benefits         |  |                    | 8,513   |                       |   | 5,809    |              |  |   |               |   |  |   | 14,322 
|Other liabilities                                   |  |                    | 9,000   |                       |   | 7,581    |              |  |   |               |   |  |   | 16,581 
|Accrued income taxes                                |  |                    | 1,565   |                       |   |         |              |  |   |               |   |  |   | 1,565  
|Current portion of long-term debt                   |  |                    | 13,626  |                       |   | 259      |              |  |   |               |   |  |   | 13,885 
|Current portion of lease financing obligations      |  |                    | 1,383   |                       |   | 1,906    |              |  |   | (833           | ) |  |   | 2,456  
|                                                    |  |                    |         |                       |   |          |              |  |   |                |   |  |   |        
|Total current liabilities                           |  |                    | 46,793  |                       |   | 22,342   |              |  |   | (833           | ) |  |   | 68,302 
|Long-term debt, net of current portion              |  |                    | 251,063 |                       |   | 516      |              |  |   |               |   |  |   | 251,579
|Lease financing obligations, net of current portion |  |                    | 28,705  |                       |   | 82,484   |              |  |   | (30,060        | ) |  |   | 81,129 
|Deferred income sale/leaseback of real estate       |  |                    | 6,116   |                       |   | 1,181    |              |  |   | 3,074          |   |  |   | 10,371 
|Accrued postretirement benefits                     |  |                    | 3,249   |                       |   |         |              |  |   |               |   |  |   | 3,249  
|Other liabilities                                   |  |                    | 19,641  |                       |   | 7,843    |              |  |   | 90             |   |  |   | 27,574 
|                                                    |  |                    |         |                       |   |          |              |  |   |                |   |  |   |        
|Total liabilities                                   |  |                    | 355,567 |                       |   | 114,366  |              |  |   | (27,729        | ) |  |   | 442,204
|Stockholders equity                                |  |                    | 25,402  |                       |   | 19,111   |              |  |   | (19,111        | ) |  |   | 25,402 
|                                                    |  |                    |         |                       |   |          |              |  |   |                |   |  |   |        
|Total liabilities and stockholders equity          |  | $                  | 380,969 |                       | $ | 133,477  |              |  | $ | (46,840        | ) |  | $ | 467,606
|                                                    |  |                    |         |                       |   |          |              |  |   |                |   |  |   |        



14



---

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

CONSOLIDATING BALANCE SHEET

December 31, 2003

(in thousands of dollars)



|                                                    |  |                    |         |                       |   |          |              |  |   |               |   |  |   |        
|--------------------------------------------------- |  | ------------------ | ------- | --------------------- | - | -------- | ------------ |  | - | ------------- | - |  | - | -------
|                                                    |  | ParentCompany Only |         | GuarantorSubsidiaries |   |          | Eliminations |  |   | CombinedTotal
|ASSETS                                              |  |                    |         |                       |   |          |              |  |   |               |   |  |   |        
|Current Assets:                                     |  |                    |         |                       |   |          |              |  |   |               |   |  |   |        
|Cash and cash equivalents                           |  | $                  | 708     |                       | $ | 1,706    |              |  | $ |              |   |  | $ | 2,414  
|Trade and other receivables, net                    |  |                    | 372     |                       |   | 908      |              |  |   |              |   |  |   | 1,280  
|Inventories                                         |  |                    | 3,413   |                       |   | 1,523    |              |  |   |              |   |  |   | 4,936  
|Prepaid rent                                        |  |                    | 1,309   |                       |   | 1,225    |              |  |   |              |   |  |   | 2,534  
|Prepaid expenses and other current assets           |  |                    | 1,150   |                       |   | 2,893    |              |  |   |              |   |  |   | 4,043  
|Deferred income taxes                               |  |                    | 6,286   |                       |   |         |              |  |   |              |   |  |   | 6,286  
|                                                    |  |                    |         |                       |   |          |              |  |   |               |   |  |   |        
|Total current assets                                |  |                    | 13,238  |                       |   | 8,255    |              |  |   |              |   |  |   | 21,493 
|Property and equipment, net                         |  |                    | 118,489 |                       |   | 142,060  |              |  |   | (24,196       | ) |  |   | 236,353
|Franchise rights, net                               |  |                    | 86,148  |                       |   |         |              |  |   |              |   |  |   | 86,148 
|Goodwill, net                                       |  |                    | 1,473   |                       |   | 122,388  |              |  |   |              |   |  |   | 123,861
|Intercompany receivable (payable)                   |  |                    | 147,675 |                       |   | (147,675 | )            |  |   |              |   |  |   |       
|Investment in subsidiaries                          |  |                    | 14,206  |                       |   |         |              |  |   | (14,206       | ) |  |   |       
|Deferred income taxes                               |  |                    | 8,619   |                       |   |         |              |  |   |              |   |  |   | 8,619  
|Other assets                                        |  |                    | 6,163   |                       |   | 5,584    |              |  |   | (1,347        | ) |  |   | 10,400 
|                                                    |  |                    |         |                       |   |          |              |  |   |               |   |  |   |        
|Total assets                                        |  | $                  | 396,011 |                       | $ | 130,612  |              |  | $ | (39,749       | ) |  | $ | 486,874
|                                                    |  |                    |         |                       |   |          |              |  |   |               |   |  |   |        
|LIABILITIES AND STOCKHOLDERS EQUITY                |  |                    |         |                       |   |          |              |  |   |               |   |  |   |        
|Current Liabilities:                                |  |                    |         |                       |   |          |              |  |   |               |   |  |   |        
|Accounts payable                                    |  | $                  | 10,918  |                       | $ | 6,312    |              |  | $ |              |   |  | $ | 17,230 
|Accrued interest                                    |  |                    | 1,549   |                       |   |         |              |  |   |              |   |  |   | 1,549  
|Accrued payroll, related taxes and benefits         |  |                    | 6,826   |                       |   | 4,719    |              |  |   |              |   |  |   | 11,545 
|Other liabilities                                   |  |                    | 6,757   |                       |   | 8,140    |              |  |   |              |   |  |   | 14,897 
|Accrued income taxes                                |  |                    | 836     |                       |   |         |              |  |   |              |   |  |   | 836    
|Current portion of long-term debt                   |  |                    | 13,758  |                       |   | 247      |              |  |   |              |   |  |   | 14,005 
|Current portion of lease financing obligations      |  |                    | 1,292   |                       |   | 1,723    |              |  |   | (727          | ) |  |   | 2,288  
|                                                    |  |                    |         |                       |   |          |              |  |   |               |   |  |   |        
|Total current liabilities                           |  |                    | 41,936  |                       |   | 21,141   |              |  |   | (727          | ) |  |   | 62,350 
|Long-term debt, net of current portion              |  |                    | 281,176 |                       |   | 651      |              |  |   |              |   |  |   | 281,827
|Lease financing obligations, net of current portion |  |                    | 29,418  |                       |   | 80,290   |              |  |   | (27,311       | ) |  |   | 82,397 
|Deferred income sale/leaseback of real estate       |  |                    | 3,673   |                       |   | 2,192    |              |  |   | 2,976         |   |  |   | 8,841  
|Accrued postretirement benefits                     |  |                    | 2,962   |                       |   |         |              |  |   |              |   |  |   | 2,962  
|Other liabilities                                   |  |                    | 15,876  |                       |   | 11,621   |              |  |   | 30            |   |  |   | 27,527 
|                                                    |  |                    |         |                       |   |          |              |  |   |               |   |  |   |        
|Total liabilities                                   |  |                    | 375,041 |                       |   | 115,895  |              |  |   | (25,032       | ) |  |   | 465,904
|Stockholders equity                                |  |                    | 20,970  |                       |   | 14,717   |              |  |   | (14,717       | ) |  |   | 20,970 
|                                                    |  |                    |         |                       |   |          |              |  |   |               |   |  |   |        
|Total liabilities and stockholders equity          |  | $                  | 396,011 |                       | $ | 130,612  |              |  | $ | (39,749       | ) |  | $ | 486,874
|                                                    |  |                    |         |                       |   |          |              |  |   |               |   |  |   |        



15



---

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

CONSOLIDATING STATEMENT OF OPERATIONS

Three Months Ended June 30, 2004

(in thousands of dollars)

(unaudited)



|                                      |  |                    |        |   |                       |   |              |  |   |               |   |  |   |        
|------------------------------------- |  | ------------------ | ------ | - | --------------------- | - | ------------ |  | - | ------------- | - |  | - | -------
|                                      |  | ParentCompany Only |        |   | GuarantorSubsidiaries |   | Eliminations |  |   | CombinedTotal
|Revenues:                             |  |                    |        |   |                       |   |              |  |   |               |   |  |   |        
|Restaurant sales                      |  | $                  | 95,297 |   |                       | $ | 82,225       |  | $ |              |   |  | $ | 177,522
|Franchise royalty revenues and fees   |  |                    |       |   |                       |   | 401          |  |   |              |   |  |   | 401    
|                                      |  |                    |        |   |                       |   |              |  |   |               |   |  |   |        
|Total revenues                        |  |                    | 95,297 |   |                       |   | 82,626       |  |   |              |   |  |   | 177,923
|                                      |  |                    |        |   |                       |   |              |  |   |               |   |  |   |        
|Costs and expenses:                   |  |                    |        |   |                       |   |              |  |   |               |   |  |   |        
|Cost of sales                         |  |                    | 27,233 |   |                       |   | 25,087       |  |   |              |   |  |   | 52,320 
|Restaurant wages and related expenses |  |                    | 29,343 |   |                       |   | 22,328       |  |   |              |   |  |   | 51,671 
|Restaurant rent expense               |  |                    | 5,658  |   |                       |   | 2,409        |  |   | 656           |   |  |   | 8,723  
|Other restaurant operating expenses   |  |                    | 13,023 |   |                       |   | 9,836        |  |   |              |   |  |   | 22,859 
|Advertising expense                   |  |                    | 3,688  |   |                       |   | 3,358        |  |   |              |   |  |   | 7,046  
|General and administrative            |  |                    | 5,740  |   |                       |   | 4,747        |  |   |              |   |  |   | 10,487 
|Depreciation and amortization         |  |                    | 6,657  |   |                       |   | 4,487        |  |   | (349          | ) |  |   | 10,795 
|Impairment losses                     |  |                    | 308    |   |                       |   |             |  |   |              |   |  |   | 308    
|                                      |  |                    |        |   |                       |   |              |  |   |               |   |  |   |        
|Total operating expenses              |  |                    | 91,650 |   |                       |   | 72,252       |  |   | 307           |   |  |   | 164,209
|                                      |  |                    |        |   |                       |   |              |  |   |               |   |  |   |        
|Income from operations                |  |                    | 3,647  |   |                       |   | 10,374       |  |   | (307          | ) |  |   | 13,714 
|Interest expense                      |  |                    | 6,165  |   |                       |   | 1,635        |  |   | (476          | ) |  |   | 7,324  
|Intercompany allocations              |  |                    | (4,556 | ) |                       |   | 4,556        |  |   |              |   |  |   |       
|                                      |  |                    |        |   |                       |   |              |  |   |               |   |  |   |        
|Income before income taxes            |  |                    | 2,038  |   |                       |   | 4,183        |  |   | 169           |   |  |   | 6,390  
|Provision for income taxes            |  |                    | 525    |   |                       |   | 1,812        |  |   |              |   |  |   | 2,337  
|Equity income from subsidiaries       |  |                    | 2,540  |   |                       |   |             |  |   | (2,540        | ) |  |   |       
|                                      |  |                    |        |   |                       |   |              |  |   |               |   |  |   |        
|Net income                            |  | $                  | 4,053  |   |                       | $ | 2,371        |  | $ | (2,371        | ) |  | $ | 4,053  
|                                      |  |                    |        |   |                       |   |              |  |   |               |   |  |   |        



16



---

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

CONSOLIDATING STATEMENT OF OPERATIONS

Three Months Ended June 30, 2003

(in thousands of dollars)

(unaudited)



|                                       |  |                    |         |   |                       |   |         |              |  |   |                                     |   |  |   |        
|-------------------------------------- |  | ------------------ | ------- | - | --------------------- | - | ------- | ------------ |  | - | ----------------------------------- | - |  | - | -------
|                                       |  | ParentCompany Only |         |   | GuarantorSubsidiaries |   |         | Eliminations |  |   | As Restated (Note 2) Combined Total
|Revenues:                              |  |                    |         |   |                       |   |         |              |  |   |                                     |   |  |   |        
|Restaurant sales                       |  | $                  | 91,783  |   |                       | $ | 73,480  |              |  | $ |                                    |   |  | $ | 165,263
|Franchise royalty revenues and fees    |  |                    |        |   |                       |   | 358     |              |  |   |                                    |   |  |   | 358    
|                                       |  |                    |         |   |                       |   |         |              |  |   |                                     |   |  |   |        
|Total revenues                         |  |                    | 91,783  |   |                       |   | 73,838  |              |  |   |                                    |   |  |   | 165,621
|                                       |  |                    |         |   |                       |   |         |              |  |   |                                     |   |  |   |        
|Costs and expenses:                    |  |                    |         |   |                       |   |         |              |  |   |                                     |   |  |   |        
|Cost of sales                          |  |                    | 23,547  |   |                       |   | 21,838  |              |  |   |                                    |   |  |   | 45,385 
|Restaurant wages and related expenses  |  |                    | 29,107  |   |                       |   | 20,673  |              |  |   |                                    |   |  |   | 49,780 
|Restaurant rent expense                |  |                    | 5,107   |   |                       |   | 2,216   |              |  |   | 209                                 |   |  |   | 7,532  
|Other restaurant operating expenses    |  |                    | 12,926  |   |                       |   | 9,523   |              |  |   |                                    |   |  |   | 22,449 
|Advertising expense                    |  |                    | 4,113   |   |                       |   | 3,623   |              |  |   |                                    |   |  |   | 7,736  
|General and administrative             |  |                    | 4,915   |   |                       |   | 3,875   |              |  |   | 148                                 |   |  |   | 8,938  
|Depreciation and amortization          |  |                    | 7,260   |   |                       |   | 3,808   |              |  |   | (91                                 | ) |  |   | 10,977 
|Impairment losses                      |  |                    | 387     |   |                       |   | 220     |              |  |   |                                    |   |  |   | 607    
|                                       |  |                    |         |   |                       |   |         |              |  |   |                                     |   |  |   |        
|Total operating expenses               |  |                    | 87,362  |   |                       |   | 65,776  |              |  |   | 266                                 |   |  |   | 153,404
|                                       |  |                    |         |   |                       |   |         |              |  |   |                                     |   |  |   |        
|Income from operations                 |  |                    | 4,421   |   |                       |   | 8,062   |              |  |   | (266                                | ) |  |   | 12,217 
|Interest expense                       |  |                    | 7,072   |   |                       |   | 1,371   |              |  |   | (156                                | ) |  |   | 8,287  
|Intercompany allocations               |  |                    | (18,655 | ) |                       |   | 18,655  |              |  |   |                                    |   |  |   |       
|                                       |  |                    |         |   |                       |   |         |              |  |   |                                     |   |  |   |        
|Income (loss) before income taxes      |  |                    | 16,004  |   |                       |   | (11,964 | )            |  |   | (110                                | ) |  |   | 3,930  
|Provision (benefit) for income taxes   |  |                    | 5,300   |   |                       |   | (3,693  | )            |  |   |                                    |   |  |   | 1,607  
|Equity income (loss) from subsidiaries |  |                    | (8,381  | ) |                       |   |        |              |  |   | 8,381                               |   |  |   |       
|                                       |  |                    |         |   |                       |   |         |              |  |   |                                     |   |  |   |        
|Net income (loss)                      |  | $                  | 2,323   |   |                       | $ | (8,271  | )            |  | $ | 8,271                               |   |  | $ | 2,323  
|                                       |  |                    |         |   |                       |   |         |              |  |   |                                     |   |  |   |        



17



---

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

CONSOLIDATING STATEMENT OF OPERATIONS

Six Months Ended June 30, 2004

(in thousands of dollars)

(unaudited)





|                                      |  |                    |         |   |                       |   |              |  |   |                |   |  |   |        
|------------------------------------- |  | ------------------ | ------- | - | --------------------- | - | ------------ |  | - | -------------- | - |  | - | -------
|                                      |  | ParentCompany Only |         |   | GuarantorSubsidiaries |   | Eliminations |  |   | Combined Total
|Revenues:                             |  |                    |         |   |                       |   |              |  |   |                |   |  |   |        
|Restaurant sales                      |  | $                  | 176,426 |   |                       | $ | 157,641      |  | $ |               |   |  | $ | 334,067
|Franchise royalty revenues and fees   |  |                    |        |   |                       |   | 756          |  |   |               |   |  |   | 756    
|                                      |  |                    |         |   |                       |   |              |  |   |                |   |  |   |        
|Total revenues                        |  |                    | 176,426 |   |                       |   | 158,397      |  |   |               |   |  |   | 334,823
|                                      |  |                    |         |   |                       |   |              |  |   |                |   |  |   |        
|Costs and expenses:                   |  |                    |         |   |                       |   |              |  |   |                |   |  |   |        
|Cost of sales                         |  |                    | 48,252  |   |                       |   | 47,749       |  |   |               |   |  |   | 96,001 
|Restaurant wages and related expenses |  |                    | 56,790  |   |                       |   | 42,732       |  |   |               |   |  |   | 99,522 
|Restaurant rent expense               |  |                    | 11,066  |   |                       |   | 4,912        |  |   | 1,309          |   |  |   | 17,287 
|Other restaurant operating expenses   |  |                    | 25,706  |   |                       |   | 19,043       |  |   |               |   |  |   | 44,749 
|Advertising expense                   |  |                    | 6,949   |   |                       |   | 5,924        |  |   |               |   |  |   | 12,873 
|General and administrative            |  |                    | 11,265  |   |                       |   | 8,981        |  |   |               |   |  |   | 20,246 
|Depreciation and amortization         |  |                    | 13,482  |   |                       |   | 8,878        |  |   | (674           | ) |  |   | 21,686 
|Impairment losses                     |  |                    | 569     |   |                       |   |             |  |   |               |   |  |   | 569    
|                                      |  |                    |         |   |                       |   |              |  |   |                |   |  |   |        
|Total operating expenses              |  |                    | 174,079 |   |                       |   | 138,219      |  |   | 635            |   |  |   | 312,933
|                                      |  |                    |         |   |                       |   |              |  |   |                |   |  |   |        
|Income from operations                |  |                    | 2,347   |   |                       |   | 20,178       |  |   | (635           | ) |  |   | 21,890 
|Interest expense                      |  |                    | 12,578  |   |                       |   | 3,269        |  |   | (946           | ) |  |   | 14,901 
|Intercompany allocations              |  |                    | (9,112  | ) |                       |   | 9,112        |  |   |               |   |  |   |       
|                                      |  |                    |         |   |                       |   |              |  |   |                |   |  |   |        
|Income (loss) before income taxes     |  |                    | (1,119  | ) |                       |   | 7,797        |  |   | 311            |   |  |   | 6,989  
|Provision (benefit) for income taxes  |  |                    | (858    | ) |                       |   | 3,415        |  |   |               |   |  |   | 2,557  
|Equity income from subsidiaries       |  |                    | 4,693   |   |                       |   |             |  |   | (4,693         | ) |  |   |       
|                                      |  |                    |         |   |                       |   |              |  |   |                |   |  |   |        
|Net income                            |  | $                  | 4,432   |   |                       | $ | 4,382        |  | $ | (4,382         | ) |  | $ | 4,432  
|                                      |  |                    |         |   |                       |   |              |  |   |                |   |  |   |        



18



---

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

CONSOLIDATING STATEMENT OF OPERATIONS

Six Months Ended June 30, 2003

(in thousands of dollars)

(unaudited)



|                                       |  |                    |         |   |                       |   |         |              |  |   |                                     |   |  |   |        
|-------------------------------------- |  | ------------------ | ------- | - | --------------------- | - | ------- | ------------ |  | - | ----------------------------------- | - |  | - | -------
|                                       |  | ParentCompany Only |         |   | GuarantorSubsidiaries |   |         | Eliminations |  |   | As Restated (Note 2) Combined Total
|Revenues:                              |  |                    |         |   |                       |   |         |              |  |   |                                     |   |  |   |        
|Restaurant sales                       |  | $                  | 175,725 |   |                       | $ | 141,440 |              |  | $ |                                    |   |  | $ | 317,165
|Franchise royalty revenues and fees    |  |                    |        |   |                       |   | 696     |              |  |   |                                    |   |  |   | 696    
|                                       |  |                    |         |   |                       |   |         |              |  |   |                                     |   |  |   |        
|Total revenues                         |  |                    | 175,725 |   |                       |   | 142,136 |              |  |   |                                    |   |  |   | 317,861
|                                       |  |                    |         |   |                       |   |         |              |  |   |                                     |   |  |   |        
|Costs and expenses:                    |  |                    |         |   |                       |   |         |              |  |   |                                     |   |  |   |        
|Cost of sales                          |  |                    | 45,650  |   |                       |   | 42,169  |              |  |   |                                    |   |  |   | 87,819 
|Restaurant wages and related expenses  |  |                    | 57,249  |   |                       |   | 39,575  |              |  |   |                                    |   |  |   | 96,824 
|Restaurant rent expense                |  |                    | 10,563  |   |                       |   | 4,398   |              |  |   | 389                                 |   |  |   | 15,350 
|Other restaurant operating expenses    |  |                    | 26,070  |   |                       |   | 17,742  |              |  |   |                                    |   |  |   | 43,812 
|Advertising expense                    |  |                    | 8,012   |   |                       |   | 6,993   |              |  |   |                                    |   |  |   | 15,005 
|General and administrative             |  |                    | 10,484  |   |                       |   | 7,550   |              |  |   | 178                                 |   |  |   | 18,212 
|Depreciation and amortization          |  |                    | 14,316  |   |                       |   | 7,675   |              |  |   | (167                                | ) |  |   | 21,824 
|Impairment losses                      |  |                    | 425     |   |                       |   | 220     |              |  |   |                                    |   |  |   | 645    
|                                       |  |                    |         |   |                       |   |         |              |  |   |                                     |   |  |   |        
|Total operating expenses               |  |                    | 172,769 |   |                       |   | 126,322 |              |  |   | 400                                 |   |  |   | 299,491
|                                       |  |                    |         |   |                       |   |         |              |  |   |                                     |   |  |   |        
|Income from operations                 |  |                    | 2,956   |   |                       |   | 15,814  |              |  |   | (400                                | ) |  |   | 18,370 
|Interest expense                       |  |                    | 14,223  |   |                       |   | 2,712   |              |  |   | (292                                | ) |  |   | 16,643 
|Intercompany allocations               |  |                    | (20,391 | ) |                       |   | 20,391  |              |  |   |                                    |   |  |   |       
|                                       |  |                    |         |   |                       |   |         |              |  |   |                                     |   |  |   |        
|Income (loss) before income taxes      |  |                    | 9,124   |   |                       |   | (7,289  | )            |  |   | (108                                | ) |  |   | 1,727  
|Provision (benefit) for income taxes   |  |                    | 2,611   |   |                       |   | (1,867  | )            |  |   |                                    |   |  |   | 744    
|Equity income (loss) from subsidiaries |  |                    | (5,530  | ) |                       |   |        |              |  |   | 5,530                               |   |  |   |       
|                                       |  |                    |         |   |                       |   |         |              |  |   |                                     |   |  |   |        
|Net income (loss)                      |  | $                  | 983     |   |                       | $ | (5,422  | )            |  | $ | 5,422                               |   |  | $ | 983    
|                                       |  |                    |         |   |                       |   |         |              |  |   |                                     |   |  |   |        



19



---

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

CONSOLIDATING STATEMENT OF CASH FLOWS

Six Months Ended June 30, 2004

(in thousands of dollars)

(unaudited)



|                                                                                                      |  |                    |         |   |                       |   |         |              |  |   |                |   |  |   |         |  
|----------------------------------------------------------------------------------------------------- |  | ------------------ | ------- | - | --------------------- | - | ------- | ------------ |  | - | -------------- | - |  | - | ------- | -
|                                                                                                      |  | ParentCompany Only |         |   | GuarantorSubsidiaries |   |         | Eliminations |  |   | Combined Total |  
|Cash flows provided from operating activities:                                                        |  |                    |         |   |                       |   |         |              |  |   |                |   |  |   |         |  
|Net income (loss)                                                                                     |  | $                  | (259    | ) |                       | $ | 4,380   |              |  | $ | 311            |   |  | $ | 4,432   |  
|Adjustments to reconcile net income (loss) to net cash provided from (used for) operating activities: |  |                    |         |   |                       |   |         |              |  |   |                |   |  |   |         |  
|Gain on sales of properties                                                                           |  |                    | (288    | ) |                       |   |        |              |  |   |               |   |  |   | (288    | )
|Depreciation and amortization                                                                         |  |                    | 13,482  |   |                       |   | 8,878   |              |  |   | (674           | ) |  |   | 21,686  |  
|Impairment losses                                                                                     |  |                    | 569     |   |                       |   |        |              |  |   |               |   |  |   | 569     |  
|Deferred income taxes                                                                                 |  |                    | (109    | ) |                       |   |        |              |  |   |               |   |  |   | (109    | )
|Changes in operating assets and liabilities                                                           |  |                    | 15,747  |   |                       |   | (13,398 | )            |  |   | (31            | ) |  |   | 2,318   |  
|                                                                                                      |  |                    |         |   |                       |   |         |              |  |   |                |   |  |   |         |  
|Net cash provided from (used for) operating activities                                                |  |                    | 29,142  |   |                       |   | (140    | )            |  |   | (394           | ) |  |   | 28,608  |  
|                                                                                                      |  |                    |         |   |                       |   |         |              |  |   |                |   |  |   |         |  
|Cash flow used for investing activities:                                                              |  |                    |         |   |                       |   |         |              |  |   |                |   |  |   |         |  
|Capital expenditures:                                                                                 |  |                    |         |   |                       |   |         |              |  |   |                |   |  |   |         |  
|New restaurant development                                                                            |  |                    | (931    | ) |                       |   | (2,586  | )            |  |   |               |   |  |   | (3,517  | )
|Restaurant remodeling                                                                                 |  |                    | (479    | ) |                       |   |        |              |  |   |               |   |  |   | (479    | )
|Other restaurant expenditures                                                                         |  |                    | (1,119  | ) |                       |   | (1,574  | )            |  |   |               |   |  |   | (2,693  | )
|Corporate and restaurant information systems                                                          |  |                    | (255    | ) |                       |   | (107    | )            |  |   |               |   |  |   | (362    | )
|                                                                                                      |  |                    |         |   |                       |   |         |              |  |   |                |   |  |   |         |  
|Total capital expenditures                                                                            |  |                    | (2,784  | ) |                       |   | (4,267  | )            |  |   |               |   |  |   | (7,051  | )
|Properties purchased for sale-leaseback                                                               |  |                    | (924    | ) |                       |   |        |              |  |   |               |   |  |   | (924    | )
|Proceeds from sales of other properties                                                               |  |                    | 488     |   |                       |   |        |              |  |   |               |   |  |   | 488     |  
|                                                                                                      |  |                    |         |   |                       |   |         |              |  |   |                |   |  |   |         |  
|Net cash used for investing activities                                                                |  |                    | (3,220  | ) |                       |   | (4,267  | )            |  |   |               |   |  |   | (7,487  | )
|                                                                                                      |  |                    |         |   |                       |   |         |              |  |   |                |   |  |   |         |  
|Cash flows provided from (used for) financing activities:                                             |  |                    |         |   |                       |   |         |              |  |   |                |   |  |   |         |  
|Borrowings from revolving credit facility, net                                                        |  |                    | 700     |   |                       |   |        |              |  |   |               |   |  |   | 700     |  
|Principal payments on term loans                                                                      |  |                    | (6,750  | ) |                       |   |        |              |  |   |               |   |  |   | (6,750  | )
|Principal pre-payments on term loans                                                                  |  |                    | (24,000 | ) |                       |   |        |              |  |   |               |   |  |   | (24,000 | )
|Principal payments on lease financing obligations                                                     |  |                    | (622    | ) |                       |   | (873    | )            |  |   | 394            |   |  |   | (1,101  | )
|Payments on other notes payable, net                                                                  |  |                    | (117    | ) |                       |   |        |              |  |   |               |   |  |   | (117    | )
|Principal payments on capital leases                                                                  |  |                    | (78     | ) |                       |   | (123    | )            |  |   |               |   |  |   | (201    | )
|Proceeds from lease financing obligations, net                                                        |  |                    |        |   |                       |   | 3,250   |              |  |   | (3,250         | ) |  |   |        |  
|Financing costs associated with lease financing obligations                                           |  |                    |        |   |                       |   | (98     | )            |  |   | 98             |   |  |   |        |  
|Proceeds from sale/leaseback transactions                                                             |  |                    | 5,040   |   |                       |   | 3,068   |              |  |   | 3,152          |   |  |   | 11,260  |  
|                                                                                                      |  |                    |         |   |                       |   |         |              |  |   |                |   |  |   |         |  
|Net cash provided from (used for) financing activities                                                |  |                    | (25,827 | ) |                       |   | 5,224   |              |  |   | 394            |   |  |   | (20,209 | )
|                                                                                                      |  |                    |         |   |                       |   |         |              |  |   |                |   |  |   |         |  
|Net increase in cash and cash equivalents                                                             |  |                    | 95      |   |                       |   | 817     |              |  |   |               |   |  |   | 912     |  
|Cash and cash equivalents, beginning of year                                                          |  |                    | 708     |   |                       |   | 1,706   |              |  |   |               |   |  |   | 2,414   |  
|                                                                                                      |  |                    |         |   |                       |   |         |              |  |   |                |   |  |   |         |  
|Cash and cash equivalents, end of year                                                                |  | $                  | 803     |   |                       | $ | 2,523   |              |  | $ |               |   |  | $ | 3,326   |  
|                                                                                                      |  |                    |         |   |                       |   |         |              |  |   |                |   |  |   |         |  



20



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CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

CONSOLIDATING STATEMENT OF CASH FLOWS

Six Months Ended June 30, 2003

(in thousands of dollars)

(unaudited)



|                                                                                           |  |                    |         |    |                       |   |         |              |  |   |                                     |   |  |   |         |  
|------------------------------------------------------------------------------------------ |  | ------------------ | ------- | -- | --------------------- | - | ------- | ------------ |  | - | ----------------------------------- | - |  | - | ------- | -
|                                                                                           |  | ParentCompany Only |         |    | GuarantorSubsidiaries |   |         | Eliminations |  |   | As Restated (Note 2) Combined Total |  
|Cash flows provided from (used for) operating activities:                                  |  |                    |         |    |                       |   |         |              |  |   |                                     |   |  |   |         |  
|Net income (loss)                                                                          |  | $                  | 6,513   |    |                       | $ | (5,422  | )            |  | $ | (108                                | ) |  | $ | 983     |  
|Adjustments to reconcile net income (loss) to net cash provided from operating activities: |  |                    |         |    |                       |   |         |              |  |   |                                     |   |  |   |         |  
|Loss on disposal of property and equipment                                                 |  |                    |        |    |                       |   | (178    | )            |  |   | 178                                 |   |  |   |        |  
|Depreciation and amortization                                                              |  |                    | 14,316  |    |                       |   | 7,675   |              |  |   | (167                                | ) |  |   | 21,824  |  
|Impairment losses                                                                          |  |                    | 425     |    |                       |   | 220     |              |  |   |                                    |   |  |   | 645     |  
|Deferred income taxes                                                                      |  |                    | 248     |    |                       |   |        |              |  |   |                                    |   |  |   | 248     |  
|Changes in operating assets and liabilities                                                |  |                    | 1,214   |    |                       |   | (3,166  | )            |  |   | (14                                 | ) |  |   | (1,966  | )
|                                                                                           |  |                    |         |    |                       |   |         |              |  |   |                                     |   |  |   |         |  
|Net cash provided from operating activities                                                |  |                    | 22,716  |    |                       |   | (871    | )            |  |   | (111                                | ) |  |   | 21,734  |  
|                                                                                           |  |                    |         |    |                       |   |         |              |  |   |                                     |   |  |   |         |  
|Cash flow used for investing activities:                                                   |  |                    |         |    |                       |   |         |              |  |   |                                     |   |  |   |         |  
|Capital expenditures:                                                                      |  |                    |         |    |                       |   |         |              |  |   |                                     |   |  |   |         |  
|New restaurant development                                                                 |  |                    | (1,613  | )  |                       |   | (10,557 | )            |  |   |                                    |   |  |   | (12,170 | )
|Restaurant remodeling                                                                      |  |                    | (2,402  | )  |                       |   | (147    | )            |  |   |                                    |   |  |   | (2,549  | )
|Other restaurant expenditures                                                              |  |                    | (1,159  | )  |                       |   | (2,663  | )            |  |   |                                    |   |  |   | (3,822  | )
|Corporate and restaurant information systems                                               |  |                    | (774    | )  |                       |   | (202    | )            |  |   |                                    |   |  |   | (976    | )
|                                                                                           |  |                    |         |    |                       |   |         |              |  |   |                                     |   |  |   |         |  
|Total capital expenditures                                                                 |  |                    | (5,948  | )  |                       |   | (13,569 | )            |  |   |                                    |   |  |   | (19,517 | )
|Proceeds from sales of other properties                                                    |  |                    |        |    |                       |   | 2,670   |              |  |   |                                    |   |  |   | 2,670   |  
|                                                                                           |  |                    |         |    |                       |   |         |              |  |   |                                     |   |  |   |         |  
|Net cash used for investing activities                                                     |  |                    | (5,948  | )  |                       |   | (10,899 | )            |  |   |                                    |   |  |   | (16,847 | )
|                                                                                           |  |                    |         |    |                       |   |         |              |  |   |                                     |   |  |   |         |  
|Cash flows provided from (used for) financing activities:                                  |  |                    |         |    |                       |   |         |              |  |   |                                     |   |  |   |         |  
|Payments on revolving credit facility, net                                                 |  |                    | (19,800 | )  |                       |   |        |              |  |   |                                    |   |  |   | (19,800 | )
|Principal payments on term loans                                                           |  |                    | (2,750  | )) |                       |   |        |              |  |   |                                    |   |  |   | (2,750  | )
|Principal payments on lease financing obligations                                          |  |                    | (546    | )  |                       |   | (551    | )            |  |   | 111                                 |   |  |   | (986    | )
|Proceeds from lease financing obligations, net                                             |  |                    |        |    |                       |   | 13,080  |              |  |   | (13,080                             | ) |  |   |        |  
|Financing costs associated with lease financing obligations                                |  |                    |        |    |                       |   | (721    | )            |  |   | 721                                 |   |  |   |        |  
|Payments on other notes payable                                                            |  |                    | (519    | )  |                       |   |        |              |  |   |                                    |   |  |   | (519    | )
|Principal payments on capital leases                                                       |  |                    | (95     | )  |                       |   | (149    | )            |  |   |                                    |   |  |   | (244    | )
|Proceeds from sale/leaseback transactions                                                  |  |                    | 7,058   |    |                       |   | 22      |              |  |   | 12,359                              |   |  |   | 19,439  |  
|                                                                                           |  |                    |         |    |                       |   |         |              |  |   |                                     |   |  |   |         |  
|Net cash (used for) provided from financing activities                                     |  |                    | (16,652 | )  |                       |   | 11,681  |              |  |   | 111                                 |   |  |   | (4,860  | )
|                                                                                           |  |                    |         |    |                       |   |         |              |  |   |                                     |   |  |   |         |  
|Net increase (decrease) in cash and cash equivalents                                       |  |                    | 116     |    |                       |   | (89     | )            |  |   |                                    |   |  |   | 27      |  
|Cash and cash equivalents, beginning of period                                             |  |                    | 715     |    |                       |   | 1,823   |              |  |   |                                    |   |  |   | 2,538   |  
|                                                                                           |  |                    |         |    |                       |   |         |              |  |   |                                     |   |  |   |         |  
|Cash and cash equivalents, end of period                                                   |  | $                  | 831     |    |                       | $ | 1,734   |              |  | $ |                                    |   |  | $ | 2,565   |  
|                                                                                           |  |                    |         |    |                       |   |         |              |  |   |                                     |   |  |   |         |  



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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS



Certain statements included in this Managements Discussion and Analysis of Financial Condition and Results of Operations and
elsewhere in this Quarterly Report on Form 10-Q which are not statements of historical fact are intended to be, and are hereby identified as, forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Those statements include statements regarding the intent, belief or current expectations of the Company and its management team. Investors are cautioned that any such
forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those projected in the forward-looking statements. Such risks and uncertainties include,
among other things, competitive conditions, economic and regulatory factors, general economic conditions particularly at the retail level, fluctuations in commodity prices, availability of restaurant supply and distribution of product, liquidity of
major distributors, labor and employee benefit costs, the outcome of pending or yet-to-be instituted legal proceedings, the ability of the Company to manage its growth and successfully implement its business strategy, environmental conditions and
regulations, weather conditions, significant disruptions in service or supply by any of our suppliers, risks associated with the expansion of our business, general risks associated with the food industry, our inability to integrate any businesses we
acquire, our borrowing costs and credit ratings, which may be influenced by credit ratings of our competitors, the risk of events similar to those of September 11, 2001 or an outbreak or escalation of any insurrection or armed conflict involving the
United States or any other national or international calamity, factors that affect the food industry generally, including recalls if products became adulterated or misbranded, liability if product consumption causes injury, ingredient disclosure and
labeling laws and regulations and the possibility that consumer could lose confidence in the safety and quality of certain food products, as well as recent publicity concerning the health implications of obesity and transfatty acids, the
availability and terms of necessary or desirable financing or refinancing and other risks and uncertainties that are discussed herein and in our Annual Report on Form 10-K for the year ended December 31, 2003.



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



Overview



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



22



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Restatement



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



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



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



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



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



Initial Public Offering



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



23



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



Significant Accounting Policies



Financial Reporting Release No. 60 requires all companies to include a
discussion of critical accounting policies or methods used in the preparation of financial statements. The following is a brief discussion of the more significant accounting policies and methods used by us.



The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires us to make assumptions and estimates that can have a material impact on our results of operations. Sales recognition at company-operated restaurants is straightforward as customers pay for
products at the time of sale and inventory turns over very quickly. Payments to vendors for products sold in the restaurants are generally settled within 30 days. The earnings reporting process is covered by our system of internal controls, and
generally does not require significant management estimates and judgments. However, estimates and judgments, as noted below, are inherent in the assessment and recording of accrued occupancy costs, insurance liabilities, legal obligations, income
taxes and the valuation of goodwill for impairment. While we apply our judgment based on assumptions believed to be reasonable under the circumstances, actual results could vary from these assumptions. It is possible that materially different
amounts would be reported using different assumptions.



Accrued occupancy costs. We make estimates of accrued occupancy costs pertaining to closed restaurant locations on an ongoing basis. These estimates require assessment and continuous evaluation of a number of factors
such as the remaining contractual period under our lease obligations, the amount of sublease income, if any, we are able to realize on a particular property and estimates of other costs such as property taxes. Differences between actual future
events and prior estimates could result in adjustments to these accrued costs. At June 30, 2004 we had four non-operating properties.



Insurance liabilities. We are self-insured for most workers compensation, general liability and medical insurance claims. At
June 30, 2004 we had $9.4 million accrued for these insurance claims. We record insurance liabilities based on historical and industry trends, which are continually monitored, and adjust accruals as warranted by changing circumstances. Since there
are many estimates and assumptions involved in recording these insurance liabilities, including the ability to estimate the future development of incurred claims based on historical trends, differences between actual future events and prior
estimates and assumptions could result in adjustments to these liabilities.



Legal obligations. In the normal course of business, we must make estimates of potential future legal obligations and liabilities, which require the use of managements judgment. Management
may also use outside legal advice to assist in the estimating process. However, the ultimate outcome of various legal issues could be different than management estimates and adjustments to income could be required.



24



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Income taxes. We record income tax liabilities utilizing known obligations and
estimates of potential obligations. We are required to record a valuation allowance if the value of estimated deferred tax assets are different from those recorded. This would include making estimates and judgments on future taxable income, the
consideration of feasible tax planning strategies and existing facts and circumstances. When the amount of deferred tax assets to be realized is different from that recorded, the asset balance and income statement would reflect the change in the
period such determination is made.



Goodwill
valuation. We must evaluate our recorded intangible assets for impairment under Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets, on an ongoing basis. We have elected to
conduct our annual impairment review of goodwill and other intangible assets at December 31. Our review at December 31, 2003 indicated there has been no impairment as of that date. This annual evaluation requires us to make estimates and assumptions
regarding the fair value of our reporting units. These estimates may differ from actual future events.



Results of Operations



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



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



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



|                                      |  |       |   |  |       |  
|------------------------------------- |  | ----- | - |  | ----- | -
|                                      |  | 2004  |   |  | 2003  |  
|Restaurant sales:                     |  |       |   |  |       |  
|Burger King                           |  | 53.7  | % |  | 55.5  | %
|Pollo Tropical                        |  | 17.3  | % |  | 16.2  | %
|Taco Cabana                           |  | 29.0  | % |  | 28.3  | %
|                                      |  |       |   |  |       |  
|                                      |  | 100.0 | % |  | 100.0 | %
|Costs and expenses:                   |  |       |   |  |       |  
|Cost of sales                         |  | 29.5  | % |  | 27.5  | %
|Restaurant wages and related expenses |  | 29.1  | % |  | 30.1  | %
|Restaurant rent expense               |  | 4.9   | % |  | 4.6   | %
|Other restaurant operating expenses   |  | 12.9  | % |  | 13.6  | %
|Advertising expense                   |  | 4.0   | % |  | 4.7   | %
|General and administrative            |  | 5.9   | % |  | 5.4   | %
|Income from restaurant operations     |  | 7.5   | % |  | 7.2   | %



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



25



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



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



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



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



26



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



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



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



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



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



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



27



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



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



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



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



|                                      |  |       |   |  |       |  
|------------------------------------- |  | ----- | - |  | ----- | -
|                                      |  | 2004  |   |  | 2003  |  
|Restaurant sales:                     |  |       |   |  |       |  
|Burger King                           |  | 52.8  | % |  | 55.4  | %
|Pollo Tropical                        |  | 18.0  | % |  | 16.8  | %
|Taco Cabana                           |  | 29.2  | % |  | 27.8  | %
|                                      |  |       |   |  |       |  
|                                      |  | 100.0 | % |  | 100.0 | %
|Costs and expenses:                   |  |       |   |  |       |  
|Cost of sales                         |  | 28.7  | % |  | 27.7  | %
|Restaurant wages and related expenses |  | 29.8  | % |  | 30.5  | %
|Restaurant rent expense               |  | 5.2   | % |  | 4.8   | %
|Other restaurant operating expenses   |  | 13.4  | % |  | 13.8  | %
|Advertising expense                   |  | 3.9   | % |  | 4.7   | %
|General and administrative            |  | 6.1   | % |  | 5.7   | %
|Income from restaurant operations     |  | 6.3   | % |  | 5.6   | %



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



28



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



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



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



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



29



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



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



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



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



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



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



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



Off-Balance Sheet Arrangements



We have no off-balance sheet arrangements.



30



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Liquidity and Capital Resources



We do not have significant receivables or inventory and receive trade credit based upon negotiated terms in purchasing food
products and other supplies. We are able to operate with a substantial working capital deficit because:



| |  | restaurant operations are primarily conducted on a cash basis;
| | - | --------------------------------------------------------------



| |  | rapid turnover results in a limited investment in inventories; and
| | - | ------------------------------------------------------------------



| |  | cash from sales is usually received before related accounts for food, supplies and payroll become due.
| | - | ------------------------------------------------------------------------------------------------------



Our cash requirements have arisen from:



| |  | servicing our debt;
| | - | -------------------



| |  | ongoing capital reinvestment in our existing restaurants; and
| | - | -------------------------------------------------------------



| |  | financing the opening and equipping of new restaurants.
| | - | -------------------------------------------------------



Interest payments under our senior subordinated notes and other existing debt obligations represent significant liquidity requirements for us. We believe
cash generated from our operations and availability under our revolving credit facility will provide sufficient cash availability to cover our working capital needs, capital expenditures, planned development and debt service requirements for the
next twelve months.



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



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



31



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



|                                |  |                        |       |               |   |            |  |              |       |  |   |       
|------------------------------- |  | ---------------------- | ----- | ------------- | - | ---------- |  | ------------ | ----- |  | - | ------
|                                |  | TacoCabana             |       | PolloTropical |   | BurgerKing |  | Consolidated
|                                |  | (Dollars in thousands)
|Six Months Ended June 30, 2003: |  |                        |       |               |   |            |  |              |       |  |   |       
|Restaurant maintenance          |  | $                      | 1,225 |               | $ | 1,438      |  | $            | 1,159 |  | $ | 3,822 
|Restaurant remodeling           |  |                        | 121   |               |   | 26         |  |              | 2,402 |  |   | 2,549 
|New restaurant development      |  |                        | 8,302 |               |   | 2,255      |  |              | 1,613 |  |   | 12,170
|Other capital expenditures      |  |                        | 81    |               |   | 121        |  |              | 774   |  |   | 976   
|                                |  |                        |       |               |   |            |  |              |       |  |   |       
|Total capital expenditures      |  | $                      | 9,729 |               | $ | 3,840      |  | $            | 5,948 |  | $ | 19,517
|Number of new restaurants       |  |                        | 4     |               |   | 2          |  |              | 1     |  |   | 7     
|Six Months Ended June 30, 2004: |  |                        |       |               |   |            |  |              |       |  |   |       
|Restaurant maintenance          |  | $                      | 991   |               | $ | 583        |  | $            | 1,119 |  | $ | 2,693 
|Restaurant remodeling           |  |                        |      |               |   |           |  |              | 479   |  |   | 479   
|New restaurant development      |  |                        | 2,586 |               |   |           |  |              | 931   |  |   | 3,517 
|Other capital expenditures      |  |                        | 50    |               |   | 57         |  |              | 255   |  |   | 362   
|                                |  |                        |       |               |   |            |  |              |       |  |   |       
|Total capital expenditures      |  | $                      | 3,627 |               | $ | 640        |  | $            | 2,784 |  | $ | 7,051 
|Number of new restaurants       |  |                        | 3     |               |   | 0          |  |              | 1     |  |   | 4     



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



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



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



32



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



As a result of the restatement of our previously issued financial statements discussed above, we were in default related to certain required financial leverage ratios and other covenants under our senior secured credit facility. We obtained
a waiver from our senior secured lenders of any prior non-compliance and defaults resulting from the restatement. In addition, our senior secured credit facility was amended to exclude all adjustments resulting from this restatement on our financial
covenant requirements and to treat, on a prospective basis, the specified leases as if no restatement or recharacterization had occurred. We were in compliance with the covenants under our senior credit facility, as amended, and the indenture
governing our 9.5% Senior Subordinated Notes due 2008 as of June 30, 2004.



Inflation



The inflationary factors that have
historically affected our results of operations include increases in food and paper costs, labor and other operating expenses. Wages paid in our restaurants are impacted by changes in the federal and state hourly minimum wage rates. Accordingly,
changes in the federal and state hourly minimum wage rates directly affect our labor costs. The restaurant industry and we typically attempt to offset the effect of inflation, at least in part, through periodic menu price increases and various cost
reduction programs. We cannot assure you that we will be able to offset such inflationary cost increases in the future.



Recent Accounting Pronouncements



In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation of Variable Interest Entities, an interpretation of Accounting
Research Bulletin (ARB) No. 51 (FIN 46). FIN 46 is intended to clarify the application of the majority voting interest requirement of ARB No. 51, Consolidated Financial Statements, to certain entities in which equity investors do not
have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The controlling financial interest
may be achieved through arrangements that do not involve voting interests. A company that holds variable interests in an entity will need to consolidate the variable interest entity (VIE) if the companys interest in the VIE is such that the
company will absorb a majority of the VIEs expected losses and/or receive a majority of the entitys expected residual returns, if they occur. FIN 46 also requires additional disclosures by primary beneficiaries and other significant
variable interest holders. FIN 46 may be applied prospectively with a cumulative-effect



33



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



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



ITEM 3  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS



There were no material changes from the information presented in Item 7A of the Companys Annual Report on Form 10-K for the year ended December 31, 2003 with respect to the Companys market risk sensitive
instruments.



ITEM 4  CONTROLS AND PROCEDURES



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



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



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



34



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PART II - OTHER INFORMATION



|Item 1. | Legal Proceedings
|------- | -----------------



There were no material legal proceedings commenced by or initiated against the Company during the reported quarter or material developments in any
previously reported litigation.



|Item 2. | Changes in Securities and Use of Proceeds and Issuer Purchases of Equity Securities
|------- | -----------------------------------------------------------------------------------



None



|Item 3. | Default Upon Senior Securities
|------- | ------------------------------



None



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



None



|Item 5. | Other Information
|------- | -----------------



None



|Item 6. | Exhibits and Reports on Form 8-K
|------- | --------------------------------



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



|            |  |                                                                                                                      
|----------- |  | ---------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  |                                                                                                                      
|            | 
|31.1        |  | Chief Executive Officers Certificate Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                     
|            | 
|31.2        |  | Chief Financial Officers Certificate Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                     
|            | 
|32.1        |  | Certificate Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|            | 
|32.2        |  | Certificate Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.



35



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



|                        |  |            |  |                                                                   
|----------------------- |  | ---------- |  | ------------------------------------------------------------------
|Date Filed or Furnished |  | ItemNumber |  | Description                                                       
|April 16, 2004          |  | 5 and 7    |  | Announced restatement of previously reported financial statements.



36



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SIGNATURES



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



|                      |  |  |  |                                                       
|--------------------- |  |  |  | ------------------------------------------------------
|                      |  |  |  | CARROLS CORPORATION                                   
|                      |  | 
|Date: August 11, 2004 |  |  |  | /s/ Alan Vituli                                       
|                      |  |  |  | (Signature)                                           
|                      |  |  |  | Alan Vituli                                           
|                      |  |  |  | Chairman of the Board and Chief Executive Officer     
|                      |  | 
|Date: August 11, 2004 |  |  |  | /s/ Paul R. Flanders                                  
|                      |  |  |  | (Signature)                                           
|                      |  |  |  | Paul R. Flanders                                      
|                      |  |  |  | Vice President  Chief Financial Officer and Treasurer