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, 2002
| |  | --------------------------------------------




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 (State or other
jurisdiction of incorporation or organization)

16-0958146 (I.R.S.
Employer Identification Number)968 James Street Syracuse, New
York (Address of principal executive offices)

13203 (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  ̈





Common stock, par value $1.00, outstanding at August 12, 2002:10 shares






---




PART I





ITEM 1FINANCIAL INFORMATION





CARROLS CORPORATION AND
SUBSIDIARIES


CONSOLIDATED BALANCE SHEETS


(in thousands of
dollars)





ASSETS

June 30,2002

December 31, 2001(unaudited)Current assets:Cash and cash equivalents

$
2,727

$
2,405Trade and other receivables, net of reserves of $128 at each date


1,351


1,741Inventories


4,844


5,094Prepaid rent


2,087


2,115Prepaid expenses and other current assets


4,426


4,262Refundable income taxes





1,133Deferred income taxes


6,797


6,797Total current assets


22,232


23,547Property and equipment, at cost less accumulated depreciationof $137,293 and $124,744, respectively


217,849


213,346Franchise rights, at cost less accumulated amortizationof $45,585 and $43,341, respectively


92,685


94,844Intangible assets, at cost less accumulated amortizationof $10,048 and $10,056, respectively


122,415


122,433Deferred income taxes


6,255


8,384Other assets


10,950


11,449Total assets

$
472,386

$
474,003





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




2




---




CARROLS CORPORATION AND SUBSIDIARIES


CONSOLIDATED BALANCE SHEETS (continued)


(in thousands of dollars)





LIABILITIES and STOCKHOLDERS EQUITY

June 30,2002


December 31, 2001(unaudited)Current liabilities:Accounts payable

$
13,169


$
16,620Accrued interest


1,327



1,518Accrued payroll, related taxes and benefits


14,521



12,872Accrued income taxes


1,111



Other liabilities


16,246



15,706Current portion of long-term debt


11,223



10,029Total current liabilities


57,597



56,745Long-term debt, net of current portion


355,004



363,615Deferred incomesale/leaseback of real estate


4,948



3,881Accrued postretirement benefits


2,465



2,310Other liabilities


31,273



32,397Total liabilities


451,287



458,948Stockholders equity:Common stock, par value $1; authorized 1,000 shares,issued and outstanding  10 shares






Additional paid-in capital


24,485



24,485Accumulated deficit


(3,386
)


(9,430
)Total stockholders equity


21,099



15,055Total liabilities and stockholders equity

$
472,386


$
474,003





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




3




---




CARROLS CORPORATION AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF OPERATIONS


THREE MONTHS ENDED JUNE 30, 2002 AND 2001


(in thousands of dollars)





2002

2001(unaudited)Revenues:Restaurant sales

$
173,025

$
166,630Franchise fees and royalty revenues


348


407Total revenues


173,373


167,037Costs and expenses:Cost of sales


48,405


47,979Restaurant wages and related expenses


50,209


48,354Other restaurant operating expenses


32,472


31,818Advertising expense


7,165


6,897General and administrative


9,682


8,187Depreciation and amortization


9,877


10,699Total operating expenses


157,810


153,934Income from operations


15,563


13,103Interest expense


6,952


8,373Income before income taxes


8,611


4,730Provision for income taxes


3,306


2,874Net income

$
5,305

$
1,856





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




4




---




CARROLS CORPORATION AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF OPERATIONS


SIX MONTHS ENDED JUNE 30, 2002 AND 2001


(in thousands of dollars)





2002

2001(unaudited)Revenues:Restaurant sales

$
330,462

$
321,361Franchise fees and royalty revenues


718


788Total revenues


331,180


322,149Costs and expenses:Cost of sales


92,258


93,428Restaurant wages and related expenses


97,797


94,584Other restaurant operating expenses


64,208


63,042Advertising expense


14,053


13,377General and administrative


19,283


17,644Depreciation and amortization


19,796


21,069Total operating expenses


307,395


303,144Income from operations


23,785


19,005Interest expense


13,983


17,548Income before income taxes


9,802


1,457Provision for income taxes


3,761


1,133Net income

$
6,041

$
324





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




5




---




CARROLS CORPORATION AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF CASH FLOWS


SIX MONTHS ENDED JUNE 30, 2002 AND 2001


(in thousands of dollars)





2002


2001(unaudited)Cash flows provided from operating activities:Net income

$
6,041


$
324Adjustments to reconcile net income to net cash provided from operating activities:Loss on disposal of property and equipment


32



Depreciation and amortization


19,796



21,069Deferred income taxes


2,129



(189
)Change in operating assets and liabilities


(709
)


(6,117
)Net cash provided from operating activities


27,289



15,087Cash flows used for investing activities:Capital expenditures:New restaurant development


(9,893
)


(7,023
)Restaurant remodeling


(8,239
)


(6,473
)Other restaurant expenditures


(4,987
)


(5,299
)Corporate and information systems


(588
)


(1,127
)Acquisition of restaurants






(1,612
)Total capital expenditures


(23,707
)


(21,534
)Properties purchased for sale-leaseback


(925
)


Proceeds from sales of property and equipment


2



24Net cash used for investing activities


(24,630
)


(21,510
)Cash flows provided from (used for) financing activities:Proceeds (payments) on revolving credit facility, net


(2,400
)


8,500Proceeds (payments) on other notes payable, net


(479
)


585Principal payments on term loans


(4,250
)


(3,500
)Principal payments on capital leases


(288
)


(257
)Proceeds from sale-leaseback transactions


5,080



Net cash provided from (used for) financing activities


(2,337
)


5,328Increase (decrease) in cash and cash equivalents


322



(1,095
)Cash and cash equivalents, beginning of period


2,405



2,712Cash and cash equivalents, end of period

$
2,727


$
1,617





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




6




---




CARROLS CORPORATION AND SUBSIDIARIES


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS





1.    Statement of Management





The accompanying unaudited
consolidated financial statements as of June 30, 2002 and for the three and six months ended June 30, 2002 and 2001 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, 2002 and 2001 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, 2001 contained in our 2001 Annual Report on Form 10-K. The
December 31, 2001 balance sheet data is derived from these audited financial statements.





2.    Intangible
Assets





Intangible assets, net of accumulated amortization, consist of the following (in thousands):





June 30, 2002

December 31, 2001Goodwill

$
121,335

$
121,335Trademarks


238


242Other


832


866$
122,415

$
122,433





Amortization expense of goodwill, which is no longer amortized
effective January 1, 2002, was $1,228,000 and $2,483,000 for the three and six months ended June 30, 2001.




7




---




CARROLS CORPORATION AND SUBSIDIARIES


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)





3.    Income Taxes





The income tax provision for the six months
ended June 30, 2002 and 2001 was comprised of the following (in thousands):





2002

2001Current

$
1,632

$
1,322Deferred


2,129


(189
)$
3,761

$
1,133





For 2002, the difference between the expected tax provision,
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. For 2001, this difference
is due to the same factors as well as the amortization of non-deductible goodwill.





4.    Business Segment
Information





The Company is engaged in the quick-service 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-service restaurant chain featuring grilled marinated chicken and authentic made from scratch side dishes. Pollo Tropicals company-owned restaurants are located in south and central Florida. Taco Cabana
is a regional quick-service restaurant chain featuring Mexican style food, including flame-grilled beef and chicken fajitas, quesadillas and other Tex-Mex dishes. Taco Cabanas company-owned restaurants are located in Texas and Oklahoma.





The Other column includes corporate related items not allocated to reportable segments, principally
corporate depreciation and amortization. Other identifiable assets consist primarily of intangible assets.




8




---




CARROLS CORPORATION AND SUBSIDIARIES


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)





Burger King

Pollo Tropical

Taco Cabana

Other


ConsolidatedThree Months Ended (dollars in thousands):June 30, 2002:Revenues

$
102,283

$
25,352

$
45,738

$



$
173,373Cost of sales


27,237


7,648


13,520






48,405Restaurant wages and related expenses


30,946


6,376


12,887






50,209Depreciation and amortization


6,404


753


1,668


1,052



9,877Income (loss) from operations


6,647


4,808


5,160


(1,052
)


15,563Capital expenditures, excluding acquisitions


6,116


5,018


3,906


337



15,377June 30, 2001:Revenues

$
95,948

$
25,203

$
45,886

$



$
167,037Cost of sales


26,569


8,086


13,324






47,979Restaurant wages and related expenses


29,442


5,868


13,044






48,354Depreciation and amortization


5,879


669


1,923


2,228



10,699Income (loss) from operations


5,348


5,068


4,915


(2,228
)


13,103Capital expenditures, excluding acquisitions


5,770


1,135


1,749


550



9,204Six Months Ended (dollars in thousands):June 30, 2002:Revenues

$
192,792

$
50,406

$
87,982

$



$
331,180Cost of sales


51,151


15,271


25,836






92,258Restaurant wages and related expenses


59,924


12,520


25,353






97,797Depreciation and amortization


12,803


1,541


3,359


2,093



19,796Income (loss) from operations


7,744


9,069


9,065


(2,093
)


23,785Capital expenditures, excluding acquisitions


10,889


5,725


6,505


588



23,707June 30, 2001:Revenues

$
184,187

$
49,808

$
88,154

$



$
322,149Cost of sales


52,142


15,902


25,384






93,428Restaurant wages and related expenses


57,708


11,613


25,263






94,584Depreciation and amortization


11,565


1,259


3,818


4,427



21,069Income (loss) from operations


5,636


9,312


8,484


(4,427
)


19,005Capital expenditures, excluding acquisitions


11,361


2,726


4,789


1,046



19,922Identifiable Assets:At June 30, 2002

$
211,451

$
35,884

$
63,855

$
161,196


$
472,386At December 31, 2001


215,249


31,668


60,776


166,310



474,003




9




---




CARROLS CORPORATION AND SUBSIDIARIES


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)





5.    Other Expense





During the fourth quarter of 2001,
management made the decision to close seven Taco Cabana restaurants in the Phoenix, Arizona market and discontinue restaurant development underway in that market. This decision resulted in a charge to other expense of $8.8 million in the fourth
quarter, representing $7.1 million in asset impairments, primarily leasehold improvements, and $1.7 million in future occupancy costs and other ongoing exit activities estimated to be incurred over a two-year period. The Company closed one
restaurant in December 2001 and the remaining six restaurants in February 2002. During the six months ended June 30, 2002, the Company paid $0.4 million respectively, in lease liabilities for the closed restaurants and the remaining lease liability
at June 30, 2002 was $0.6 million. The Company has also paid $0.3 million in the six months ended June 30, 2002 of other exit costs resulting in a June 30, 2002 reserve balance of $0.4 million.





6.    New Accounting Pronouncements





In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS 142, Goodwill and Other Intangible Assets, which supercedes Accounting Principles Board Opinion 17, Intangible Assets.
Under SFAS 142, goodwill and intangible assets with indefinite lives are no longer amortized, effective January 1, 2002, but are to be tested at least annually for impairment. Separable intangible assets with defined lives will continue to be
amortized over their useful lives.





SFAS 142 also required the Company to complete Step 1 of a transitional
goodwill impairment test by June 30, 2002. Step 1 required the comparison of the fair value of a reporting unit to its carrying value at January 1, 2002 to determine whether there is an indicated transitional goodwill impairment. Our evaluation of
impairment under Step 1 of the transitional goodwill impairment test indicated that our reporting units fair values are above their carrying values at January 1, 2002, and that there is no transitional goodwill impairment charge required.





In June 2001, the FASB issued SFAS 143, Accounting for Asset Retirement Obligations. This new
standard requires entities to recognize the fair value of an asset retirement obligation in the period which it is incurred if a reasonable estimate of fair value can be made. The provisions of SFAS 143 are effective for fiscal years beginning after
June 15, 2002. We have not yet determined the impact, if any, of the adoption of SFAS 143.




10




---




CARROLS CORPORATION AND SUBSIDIARIES


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)





In July 2002, the FASB issued SFAS 146, Accounting for Costs Associated with Exit or Disposal Activities, which nullifies Emerging Issues Task Force Issue No. 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). The provisions of SFAS 146 are effective for exit or disposal activities initiated after December 31, 2002. Previously issued
financial statements can not be restated under SFAS 146.





7.    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.





Carrols Realty Holdings





The following supplemental financial information sets forth on a consolidating basis, balance sheets, statements of operations and statements of cash flows for the Parent
Company (Carrols Corporation) only, Guarantor Subsidiaries and for the Company as of June 30, 2002 and December 31, 2001 and for the three-month and six-month periods ended June 30, 2002 and 2001. Debt and goodwill allocated to subsidiaries are
presented on an accounting push-down basis.




11




---




CARROLS CORPORATION AND SUBSIDIARIES


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)


CONSOLIDATING BALANCE SHEET


June 30, 2002


(in thousands of dollars)


(unaudited)





Parent Company Only

Guarantor Subsidiaries


Combined TotalASSETSCurrent Assets:Cash and cash equivalents

$
1,502

$
1,225


$
2,727Trade and other receivables, net


239


1,112



1,351Inventories


3,360


1,484



4,844Prepaid rent


1,253


834



2,087Prepaid expenses and other current assets


1,697


2,729



4,426Deferred income taxes


6,797






6,797Total current assets


14,848


7,384



22,232Property and equipment, net


118,149


99,700



217,849Franchise rights, net


92,685






92,685Intangible assets, net


1,548


120,867



122,415Intercompany receivable (payable)


177,714


(177,714
)


Deferred income taxes


6,255






6,255Other assets


8,460


2,490



10,950Total assets

$
419,659

$
52,727


$
472,386LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Accounts payable

$
7,805

$
5,364


$
13,169Accrued interest


1,327






1,327Accrued payroll, related taxes and benefits


9,353


5,168



14,521Other liabilities


8,024


8,222



16,246Accrued income taxes


1,111






1,111Current portion of long-term debt


10,937


286



11,223Total current liabilities


38,557


19,040



57,597Long-term debt, net of current portion


353,964


1,040



355,004Deferred income, sale/leaseback of real estate


4,948






4,948Accrued postretirement benefits


2,465






2,465Other liabilities


16,827


14,446



31,273Total liabilities


416,761


34,526



451,287Stockholders equity


2,898


18,201



21,099Total liabilities and stockholders equity

$
419,659

$
52,727


$
472,386




12




---




CARROLS CORPORATION AND SUBSIDIARIES


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)


CONSOLIDATING BALANCE SHEET


December 31, 2001


(in thousands of dollars)





Parent Company Only

Guarantor Subsidiaries


Combined TotalASSETSCurrent Assets:Cash and cash equivalents

$
921

$
1,484


$
2,405Trade and other receivables, net


423


1,318



1,741Inventories


3,572


1,522



5,094Prepaid rent


1,260


855



2,115Prepaid expenses and other current assets


1,435


2,827



4,262Refundable income taxes


1,133






1,133Deferred income taxes


6,797






6,797Total current assets


15,541


8,006



23,547Property and equipment, net


117,186


96,160



213,346Franchise rights, net


94,844






94,844Intangible assets, net


1,568


120,865



122,433Intercompany receivable (payable)


181,226


(181,226
)


Deferred income taxes


8,384






8,384Other assets


8,849


2,600



11,449Total assets

$
427,598

$
46,405


$
474,003LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Accounts payable

$
10,118

$
6,502


$
16,620Accrued interest


1,518






1,518Accrued payroll, related taxes and benefits


8,278


4,594



12,872Other liabilities


6,791


8,915



15,706Current portion of long-term debt


9,762


267



10,029Total current liabilities


36,467


20,278



56,745Long-term debt, net of current portion


362,426


1,189



363,615Deferred income, sale/leaseback of real estate


3,881






3,881Accrued postretirement benefits


2,310






2,310Other liabilities


16,705


15,692



32,397Total liabilities


421,789


37,159



458,948Stockholders equity


5,809


9,246



15,055Total liabilities and stockholders equity

$
427,598

$
46,405


$
474,003




13




---




CARROLS CORPORATION AND SUBSIDIARIES


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)


CONSOLIDATING STATEMENT OF
OPERATIONS


Three Months Ended June 30, 2002


(in thousands
of dollars)


(unaudited)





Parent Company Only


Guarantor Subsidiaries

Combined TotalRevenues:Restaurant sales

$
102,283


$
70,742

$
173,025Franchise fees and royalty revenues






348


348Total revenues


102,283



71,090


173,373Costs and expenses:Cost of sales


27,237



21,168


48,405Restaurant wages and related expenses


30,946



19,263


50,209Other restaurant operating expenses


20,496



11,976


32,472Advertising expense


4,393



2,772


7,165General and administrative


6,160



3,522


9,682Depreciation and amortization


7,199



2,678


9,877Total operating expenses


96,431



61,379


157,810Income from operations


5,852



9,711


15,563Interest expense


6,873



79


6,952Intercompany allocations


(1,736
)


1,736


Income before income taxes


715



7,896


8,611Provision for income taxes


476



2,830


3,306Net income

$
239


$
5,066

$
5,305




14




---




CARROLS CORPORATION AND SUBSIDIARIES


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)


CONSOLIDATING STATEMENT OF
OPERATIONS


Three Months Ended June 30, 2001


(in thousands
of dollars)


(unaudited)





Parent Company Only


Guarantor Subsidiaries

Combined TotalRevenues:Restaurant sales

$
95,948


$
70,682

$
166,630Franchise fees and royalty revenues






407


407Total revenues


95,948



71,089


167,037Costs and expenses:Cost of sales


26,570



21,409


47,979Restaurant wages and related expenses


29,442



18,912


48,354Other restaurant operating expenses


19,962



11,856


31,818Advertising expense


4,121



2,776


6,897General and administrative


4,629



3,558


8,187Depreciation and amortization


6,643



4,056


10,699Total operating expenses


91,367



62,567


153,934Income from operations


4,581



8,522


13,103Interest expense


8,274



99


8,373Intercompany allocations


(1,737
)


1,737


Income (loss) before income taxes


(1,956
)


6,686


4,730Provision (benefit) for income taxes


(5
)


2,879


2,874Net income (loss)

$
(1,951
)

$
3,807

$
1,856




15




---




CARROLS CORPORATION AND SUBSIDIARIES


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)


CONSOLIDATING STATEMENT OF
OPERATIONS


Six Months Ended June 30, 2002


(in thousands of
dollars)


(unaudited)





Parent Company Only


Guarantor Subsidiaries

Combined TotalRevenues:Restaurant sales

$
192,792


$
137,670

$
330,462Franchise fees and royalty revenues






718


718Total revenues


192,792



138,388


331,180Costs and expenses:Cost of sales


51,151



41,107


92,258Restaurant wages and related expenses


59,924



37,873


97,797Other restaurant operating expenses


40,655



23,553


64,208Advertising expense


8,394



5,659


14,053General and administrative


12,121



7,162


19,283Depreciation and amortization


14,387



5,409


19,796Total operating expenses


186,632



120,763


307,395Income from operations


6,160



17,625


23,785Interest expense


13,819



164


13,983Intercompany allocations


(3,472
)


3,472


Income (loss) before income taxes


(4,187
)


13,989


9,802Provision (benefit) for income taxes


(1,278
)


5,039


3,761Net income (loss)

$
(2,909
)

$
8,950

$
6,041




16




---




CARROLS CORPORATION AND SUBSIDIARIES


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)


CONSOLIDATING STATEMENT OF
OPERATIONS


Six Months Ended June 30, 2001


(in thousands of
dollars)


(unaudited)





Parent Company Only


Guarantor Subsidiaries

Combined TotalRevenues:Restaurant sales

$
184,187


$
137,174

$
321,361Franchise fees and royalty revenues






788


788Total revenues


184,187



137,962


322,149Costs and expenses:Cost of sales


52,142



41,286


93,428Restaurant wages and related expenses


57,708



36,876


94,584Other restaurant operating expenses


39,742



23,300


63,042Advertising expense


7,578



5,799


13,377General and administrative


9,816



7,828


17,644Depreciation and amortization


13,088



7,981


21,069Total operating expenses


180,074



123,070


303,144Income from operations


4,113



14,892


19,005Interest expense


17,271



277


17,548Intercompany allocations


(3,474
)


3,474


Income (loss) before income taxes


(9,684
)


11,141


1,457Provision (benefit) for income taxes


(3,673
)


4,806


1,133Net income (loss)

$
(6,011
)

$
6,335

$
324




17




---




CARROLS CORPORATION AND SUBSIDIARIES


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)


CONSOLIDATING STATEMENT OF CASH
FLOWS


Six Months Ended June 30, 2002


(in thousands of
dollars)


(unaudited)





Parent Company Only


Guarantor Subsidiaries


Combined TotalCash flows provided from operating activities:Net income (loss)

$
(2,909
)

$
8,950


$
6,041Adjustments to reconcile net income (loss) to net cash provided from operating activities:Loss on disposal of property and equipment


8



24



32Depreciation and amortization


14,387



5,409



19,796Deferred income taxes


2,129







2,129Changes in operating assets and liabilities


1,312



(2,021
)


(709
)Net cash provided from operating activities


14,927



12,362



27,289Cash flow used for investing activities:Capital expenditures:New restaurant development


(1,547
)


(8,346
)


(9,893
)Restaurant remodeling


(6,573
)


(1,666
)


(8,239
)Corporate and information systems


(325
)


(263
)


(588
)Other restaurant expenditures


(2,769
)


(2,218
)


(4,987
)Total capital expenditures


(11,214
)


(12,493
)


(23,707
)Purchased properties for sale/leaseback


(925
)






(925
)Proceeds from sales of property and equipment


2







2Net cash used for investing activities


(12,137
)


(12,493
)


(24,630
)Cash flows used for financing activities:Payments on revolving credit facility, net


(2,400
)






(2,400
)Principal payments on term loans


(4,250
)






(4,250
)Payments on other notes payable, net


(479
)






(479
)Principal payments on capital leases


(160
)


(128
)


(288
)Proceeds from sale/leaseback transactions


5,080







5,080Net cash used for financing activities


(2,209
)


(128
)


(2,337
)Net increase (decrease) in cash and cash equivalents


581



(259
)


322Cash and cash equivalents, beginning of year


921



1,484



2,405Cash and cash equivalents, end of period

$
1,502


$
1,225


$
2,727




18




---




CONSOLIDATING STATEMENT OF CASH FLOWS


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)


Six Months Ended June 30, 2001


(in thousands of dollars)


(unaudited)





Parent Company Only


Guarantor Subsidiaries


Combined TotalCash flows provided from operating activities:Net income (loss)

$
(6,011
)

$
6,335


$
324Adjustments to reconcile net income (loss) to net cash provided from operating activities:Depreciation and amortization


13,088



7,981



21,069Deferred income taxes


(2,774
)


2,585



(189
)Changes in operating assets and liabilities


4,275



(10,392
)


(6,117
)Net cash provided from operating activities


8,578



6,509



15,087Cash flow used for investing activities:Capital expenditures:New restaurant development


(1,462
)


(5,561
)


(7,023
)Restaurant remodeling


(6,473
)






(6,473
)Corporate and restaurant information systems


(404
)


(129
)


(533
)Other capital expenditures


(3,652
)


(2,241
)


(5,893
)Acquisition of restaurants


(1,612
)






(1,612
)Proceeds from dispositions of property and equipment


21



3



24Net cash used for investing activities


(13,582
)


(7,928
)


(21,510
)Cash flows provided from (used for) financing activities:Proceeds from revolving credit facility, net


8,500







8,500Proceeds from other notes payable, net


585







585Principal payments on term loans


(3,500
)






(3,500
)Principal payments on capital leases


(140
)


(117
)


(257
)Net cash provided from (used for) financing activities


5,445



(117
)


5,328Net increase (decrease) in cash and cash equivalents


441



(1,536
)


(1,095
)Cash and cash equivalents, beginning of year


785



1,927



2,712Cash and cash equivalents, end of period

$
1,226


$
391


$
1,617




19




---




ITEM 2MANAGEMENTS DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION





|
|




Certain statements included in this Managements Discussion and Analysis of
Results of Operations and Financial Condition 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. Without limiting the foregoing, the words believe, anticipate, plan,
expect, estimate, intend, and other similar expressions are intended to identify forward-looking statements. The Company cautions readers that forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievement expressed or implied by such forward-looking statements.
Such factors include, among others, the following: the success or failure of the Company or Burger King Corporation in implementing its current business and operational strategies; availability, terms and access to capital and customary trade
credit; general economic and business conditions; competition; changes in the Companys business strategy; labor relations; the outcome of pending or yet-to-be instituted legal proceedings; labor and employee benefit costs; and availability and
terms of necessary or desirable financing or refinancing.





Overview





We are one of the largest restaurant companies in the U. S. operating 527 restaurants in 16 states at June 30, 2002. We are the largest Burger King franchisee in the world, and have operated
Burger King restaurants since 1976. We also operate two regional Hispanic restaurant chains, Taco Cabana and Pollo Tropical, which operate or franchise more than 200 restaurants.





As of June 30, 2002, we operated 359 Burger King restaurants located in 13 Northeastern, Midwestern and Southeastern states. Since June 30, 2001 we have opened three additional Burger King restaurants
and closed two under-performing Burger King restaurants.





We have expanded our operations during the past four years through the
acquisition of two regional quick-casual Hispanic restaurant chains. In 1998, we acquired Pollo Tropical Inc., a restaurant chain featuring grilled marinated chicken and authentic made from scratch side dishes. Since the acquisition we
have opened 18 new Pollo Tropical restaurants and at June 30, 2002 we had 54 company owned Pollo Tropical restaurants in Florida and 26 franchised Pollo Tropical restaurants, 18 of which are in Puerto Rico. Since June 30, 2001 we have opened four
new Pollo Tropical restaurants.




20




---




MANAGEMENTS DISCUSSION AND ANALYSIS OF


RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)





In
December 2000 we acquired Taco Cabana Inc., a restaurant chain featuring Tex-Mex style food including flame-grilled beef and chicken fajitas, quesadillas, and fresh flour tortillas. As of June 30, 2002 we had 114 company owned Taco Cabana
restaurants located primarily in Texas and 10 franchised Taco Cabana restaurants. In the fourth quarter of 2001, we decided to close seven restaurants in the Phoenix, Arizona market and discontinue restaurant development underway in that market. One
Taco Cabana restaurant in Phoenix was closed in December 2001 and the six remaining Taco Cabana restaurants were closed in the first quarter of 2002. In addition since June 30, 2001, we have opened two new Taco Cabana restaurants and closed two
under-performing Taco Cabana restaurants.





We use a 52-53 week fiscal year ending on the Sunday closest to December 31.





Significant Accounting Policies





Financial Reporting Release No. 60, which was released by the Securities and Exchange Commission in December 2001, 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 the Company.





The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 governed by our system of internal controls, and generally does not require significant management estimates and judgments. However, estimates and judgments are inherent in the assessment and
recording of insurance liabilities, accrued occupancy costs, legal obligations, income taxes and the valuation of goodwill for impairment. While we base our judgments using 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.





We are essentially self-insured, subject to certain limits for both specific and aggregate losses for most workers compensation, general liability and medical insurance claims. We record and monitor insurance liabilities based
on our historical trends and industry factors, as appropriate, and adjust accruals as warranted by changing circumstances. Since there are many estimates and assumptions involved in recording these insurance liabilities, differences between actual
future events and prior estimates and assumptions could result in adjustments to these liabilities.




21




---




MANAGEMENTS DISCUSSION AND ANALYSIS OF


RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)





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.





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.





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 includes 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.





Beginning in 2002 we must evaluate our recorded goodwill for impairment under SFAS 142, Goodwill and Other Intangible
Assets, on an annual basis. This annual evaluation will require us to make estimates and assumptions regarding the fair value of our reporting units. These estimates may differ from actual future events.





Recent Accounting Pronouncements





In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS 142, Goodwill and Other Intangible Assets, which supercedes Accounting Principles Board Opinion 17, Intangible Assets.
Under SFAS 142, goodwill and intangible assets with indefinite lives are no longer amortized, effective January 1, 2002, but are to be tested at least annually for impairment. Separable intangible assets with defined lives will continue to be
amortized over their useful lives. Amortization expense of goodwill was $1,228,000 and $2,483,000 for the three and six months ended June 30, 2001.





SFAS 142 also required the Company to complete Step 1 of a transitional goodwill impairment test by June 30, 2002. Step 1 required the comparison of the fair value of a reporting unit to its carrying value at January 1, 2002 to
determine whether there is an indicated transitional goodwill impairment. Our evaluation of impairment under Step 1 of the transitional goodwill impairment test indicated that our reporting units fair values are above their carrying values at
January 1, 2002 and there is no transitional goodwill impairment charge required.


|
|



22




---




MANAGEMENTS DISCUSSION AND ANALYSIS OF RESULTS


OF OPERATIONS AND FINANCIAL CONDITION (continued)





In June
2001, the FASB issued SFAS 143, Accounting for Asset Retirement Obligations. This new standard requires entities to recognize the fair value of an asset retirement obligation in the period which it is incurred if a reasonable estimate of
fair value can be made. The provisions of SFAS 143 are effective for fiscal years beginning after June 15, 2002. We have not yet determined the impact, if any, of the adoption of SFAS 143.





In July 2002, the FASB issued SFAS 146, Accounting for Costs Associated with Exit or Disposal Activities, which nullifies Emerging Issues Task Force Issue No. 94-3,
Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). The provisions of SFAS 146 are effective for exit or disposal activities initiated
after December 31, 2002. Previously issued financial statements can not be restated under SFAS 146.





Results of Operations





Three Months Ended June 30, 2002 Compared to Three Months Ended June 30, 2001.





The following table sets forth, for the three months ended June 30, 2002 and 2001, selected operating results as a percentage of restaurant sales:





2002


2001Restaurant sales:Burger King

59.1
%

57.6
%Pollo Tropical

14.5


14.9Taco Cabana

26.4


27.5100.0


100.0Costs and expenses:Cost of sales

28.0


28.8Restaurant wages and related expenses

29.0


29.0Other restaurant expenses including advertising

22.9


23.2General and administrative

5.6


4.9Depreciation and amortization

5.7


6.4Income from restaurant operations

8.8
%

7.7
%




23




---




MANAGEMENTS DISCUSSION AND ANALYSIS OF RESULTS


OF OPERATIONS AND FINANCIAL CONDITION (continued)





Restaurant Sales





Total restaurant sales for the second quarter of 2002 increased 3.8% to $173.0 million
from $166.6 million in the second quarter of 2001. Burger King restaurant sales increased $6.3 million, or 6.6%, to $102.3 million in the second quarter of 2002 due primarily to a sales increase at our comparable Burger King restaurants of 4.9% and
the net addition of five Burger King restaurants since the end of the first quarter of 2001 including three Burger King restaurants acquired near the end of the second quarter of 2001. Pollo Tropical restaurant sales increased $0.2 million, or 0.9%,
to $25.1 million in the second quarter of 2002 due to the opening of four additional restaurants since the end of the second quarter of 2001. Sales at our comparable Pollo Tropical restaurants in the second quarter of 2002, however, decreased 5.4%
due to the economic effects of declining tourism in our Florida markets since the September 11 tragedy. Taco Cabana restaurant sales were $45.6 million in the second quarter of 2002 compared to $45.8 million in 2001. A sales increase at our
comparable Taco Cabana restaurants of 3.2% in the second quarter of 2002 was offset by the closure of seven restaurants in the Phoenix, Arizona market, primarily in the first quarter of 2002.





Operating Costs and Expenses





Cost of sales (food and paper
costs), as a percentage of total restaurant sales, decreased to 28.0% in the second quarter of 2002 from 28.8% in 2001. Burger King cost of sales, as a percentage of Burger King restaurant sales, decreased to 26.6% in the second quarter of 2002 from
27.7% in the second quarter of 2001. This decrease was due to significantly lower promotional sales discounts in the second quarter of 2002 compared to 2001, and to a lesser extent, the effects of menu price increases in the fourth quarter of 2001,
the slight reduction in size of the Burger King regular hamburger patty and a 3.5% decrease in beef commodity prices in the second quarter of 2002. Pollo Tropical cost of sales, as a percentage of Pollo Tropical restaurant sales, decreased to 30.5%
in the second quarter of 2002 compared to 32.5% in 2001 due to lower chicken costs in 2002 and menu price increases at the beginning of 2002. Taco Cabana cost of sales, as a percentage of Taco Cabana restaurant sales, increased to 29.6% in the
second quarter of 2002 from 29.1% in 2001 due to higher contracted beef costs in 2002, higher produce commodity prices and slightly higher promotional sales discounts in the second quarter of 2002, none of which were offset by menu price increases
in 2002.





Restaurant wages and related expenses, as a percentage of total restaurant sales, were 29.0% in both the second quarters of
2002 and 2001. Burger King restaurant wages and related expenses, as a percentage of Burger King restaurant sales, decreased to 30.3% in the second quarter of 2002 from 30.7% in 2001 due to the effects of higher Burger King sales volumes in the
second quarter of 2002 on fixed labor costs and menu price increases in the fourth quarter of 2001. Pollo Tropical restaurant wages and related expenses, as a percentage of Pollo Tropical restaurant sales, increased to 25.3% in the second quarter of
2002 from 23.6% in 2001 due to the effect of lower sales volumes on fixed labor costs and higher medical plan costs in the second quarter of 2002, offset partially by menu price increases at the beginning of 2002. Taco Cabana restaurant wages and
related expenses, as a percentage of Taco




24




---




MANAGEMENTS DISCUSSION AND ANALYSIS OF RESULTS


OF OPERATIONS AND FINANCIAL CONDITION (continued)





Cabana
restaurant sales, decreased to 28.2% in the second quarter of 2002 from 28.5% in 2001 due to closing seven low sales volume restaurants in the Phoenix, Arizona market, primarily in the first quarter of 2002, partially offset by a 2.7% increase in
productive labor rates in the second quarter of 2002.





Other restaurant operating expenses (which includes advertising) as a percentage
of total restaurant sales, decreased to 22.9% in the second quarter of 2002 from 23.2% in 2001. Burger King other restaurant operating expenses, as a percentage of Burger King restaurant sales, decreased to 24.3% in the second quarter of 2002 from
25.1% in the second quarter of 2001 due to the effect of higher sales volumes on fixed costs and lower utility costs. Pollo Tropical other restaurant operating expenses, as a percentage of Pollo Tropical restaurant sales, increased to 18.9% in the
second quarter of 2002 from 17.0% in 2001 due to the effect of lower sales volumes on fixed costs and an insurance gain of $0.2 million in the second quarter of 2001. Taco Cabana other restaurant operating expenses, as a percentage of Taco Cabana
restaurant sales, decreased to 21.9% in the second quarter of 2002 from 22.5% in 2001 due primarily to lower utility costs.





General and
administrative expenses increased $1.5 million in the second quarter of 2002 compared to the second quarter of 2001 due primarily to higher administrative bonus levels in the second quarter of 2002. As a percentage of total restaurant sales, general
and administrative expenses increased to 5.6% in the second quarter of 2002 from 4.9% in the second quarter of 2001.





Earnings before
interest, taxes and depreciation and amortization (EBITDA) increased 6.9% to $25.4 million in the second quarter of 2002 from $23.8 million in the second quarter of 2001. As a percentage of total revenues, EBITDA margins increased to
14.7% in the second quarter of 2002 from 14.2% in 2001 as a result of the factors discussed above.





Depreciation and amortization
decreased $0.8 million in the second quarter of 2002 from the second quarter of 2001 due to the elimination of goodwill amortization under SFAS 142 beginning January 1, 2002. Goodwill amortization was $1.2 million in the second quarter of 2001. This
decrease was partially offset by additional depreciation from our capital expenditures of $51.4 million since the end of the second quarter of 2001.





Interest expense decreased $1.4 million to $7.0 million in the second quarter of 2002 from $8.4 million in 2001 due primarily to lower effective interest rates on our debt, and, to a lesser extent, lower average debt balances in
2002. The average effective interest rate on all debt was 7.4% for the second quarter of 2002 compared to 8.8% in the second quarter of 2001.




25




---




MANAGEMENTS DISCUSSION AND ANALYSIS OF RESULTS


OF OPERATIONS AND FINANCIAL CONDITION (continued)





The
provision for income taxes for the second quarter of 2002 was derived using an estimated effective income tax rate for 2002 of 38.4%. This rate is higher than the Federal statutory tax rate of 35% due to state franchise taxes and non-deductible
amortization of certain franchise rights. This rate is lower than our effective income tax for 2001 due to the elimination of the amortization of non-deductible goodwill under SFAS 142 effective January 1, 2002.





As a result of the foregoing, net income for the second quarter of 2002 increased to $5.3 million from $1.9 million in the second quarter of 2001.





Six Months Ended June 30, 2002 Compared to Six Months Ended June 30, 2001.





The following table sets forth, for the six months ended June 30, 2002 and 2001, selected operating results as


a
percentage of restaurant sales:





2002


2001Restaurant sales:Burger King

58.3
%

57.3
%Pollo Tropical

15.1


15.3Taco Cabana

26.6


27.4100.0


100.0Costs and expenses:Cost of sales

27.9


29.1Restaurant wages and related expenses

29.6


29.4Other restaurant expenses including advertising

23.7


23.8General and administrative

5.8


5.5Depreciation and amortization

6.0


6.5Income from restaurant operations

7.0
%

5.7
%





Restaurant Sales





Total restaurant sales for the first six months of 2002 increased 2.8% to $330.5 million from $321.4 million in 2001. Burger King restaurant sales increased $8.6 million, or 4.7%, to $192.8
million in the first six months of 2002 from $184.2 million in 2001. This increase was due to a sales increase at our comparable Burger King restaurants of 2.4% for the first six months of 2002 and the net addition of four Burger King restaurants
since the beginning of 2001 including three Burger King restaurants acquired near the end of the second quarter of 2001. Pollo Tropical restaurant sales increased $0.7 million, or 1.4%, to $49.9 million in the first six months 2002 due to the
opening of four additional restaurants since the end of the second quarter of 2001. Sales at our comparable Pollo Tropical restaurants in the first six months of 2002, however, declined 5.6% due to the economic effects of declining tourism




26




---




MANAGEMENTS DISCUSSION AND ANALYSIS OF RESULTS


OF OPERATIONS AND FINANCIAL CONDITION (continued)





in our
Florida markets since the September 11 tragedy. Taco Cabana restaurant sales were $87.8 million in the first six months of 2002 compared to $88.0 million in the first six months of 2001. A sales increase at our comparable Taco Cabana restaurants of
2.4% in the first six months of 2002 was offset by the closure of seven restaurants in the Phoenix, Arizona market, primarily in the first quarter of 2002.





Operating Costs and Expenses





Cost of sales (food and paper costs), as a percentage of total
restaurant sales, decreased to 27.9% in the first six months in 2002 from 29.1% in 2001. Burger King cost of sales, as a percentage of Burger King restaurant sales, decreased to 26.5% in the first six months of 2002 from 28.3% in 2001. This decrease
was due to significantly lower promotional sales discounts in the first six months of 2002 compared to 2001, and to a lesser extent, the effects of menu price increases in 2001 and the slight reduction in size of the Burger King regular hamburger
patty in the fourth quarter of 2001. Pollo Tropical cost of sales, as a percentage of Pollo Tropical restaurant sales, decreased to 30.6% in the first six months of 2002 from 32.3% in 2001 due to lower chicken costs in 2002 and the effect of menu
price increases at the beginning of 2002. Taco Cabana cost of sales, as a percentage of Taco Cabana restaurant sales, increased to 29.4% in the first six months of 2002 from 28.9% in 2001 due to higher contracted beef costs and slightly higher
promotional sales discounts in 2002, none of which were offset by menu price increases in 2002.





Restaurant wages and related expenses,
as a percentage of total restaurant sales, increased to 29.6% in the first six months of 2002 from 29.4% in 2001. Burger King restaurant wages and related expenses, as a percentage of Burger King restaurant sales, decreased to 31.1% in the first six
months of 2002 from 31.3% in 2001. This decrease was due to the effects of higher Burger King sales volumes in the first six months of 2002 on fixed labor costs and menu price increases in 2001, offset partially by higher restaurant level incentives
in 2002. Pollo Tropical restaurant wages and related expenses, as a percentage of Pollo Tropical restaurant sales, increased to 25.1% in the first six months of 2002 from 23.6% in 2001 due to the effect of lower sales volumes on fixed labor costs.
Taco Cabana restaurant wages and related expenses, as a percentage of Taco Cabana restaurant sales, increased to 28.9% in the first six months of 2002 from 28.7% in 2001 due primarily to a 3.1% increase in productive labor rates in 2002.




27




---




MANAGEMENTS DISCUSSION AND ANALYSIS OF RESULTS


OF OPERATIONS AND FINANCIAL CONDITION (continued)





Other
restaurant operating expenses (which includes advertising) as a percentage of total restaurant sales, decreased slightly to 23.7 % in the first six months of 2002 from 23.8% in 2001. Burger King other restaurant operating expenses, as a percentage
of Burger King restaurant sales, decreased to 25.4% in the first six months of 2002 from 25.7% in 2001 due to lower utility costs partially offset by an increase in local advertising expenditures. Pollo Tropical other restaurant operating expenses,
as a percentage of Pollo Tropical restaurant sales, increased to 19.4% in the first six months of 2002 from 18.5% in 2001. This increase was due to the effect of lower sales volumes in 2002 on fixed costs and an insurance gain of $0.4 million in the
first six months of 2001, partially offset by lower utility costs and lower advertising expenditures in 2002. Taco Cabana other restaurant operating expenses, as a percentage of Taco Cabana restaurant sales, decreased to 22.3% in the first six
months of 2002 from 22.8% in 2001 due primarily to lower utility costs in 2002.





General and administrative expenses, increased $1.6
million in the first six months of 2002 compared to the first six months of 2001 due primarily to higher administrative bonus levels in 2002. As a percentage of total restaurant sales, general and administrative expenses increased to 5.8% in the
first six months of 2002 from 5.5% in 2001.





Earnings before interest, taxes and depreciation and amortization (EBITDA)
increased 8.8% to $43.6 million in the first six months of 2002 from $40.1 million in 2001. As a percentage of total revenues, EBITDA margins increased to 13.2% in the first six months of 2002 compared to 12.4% in 2001 as a result of the factors
discussed above.





Depreciation and amortization decreased $1.3 million in the first six months of 2002 from the first six months of 2001
due to the elimination of goodwill amortization under SFAS 142 beginning January 1, 2002. Goodwill amortization was $2.5 million in the first six months of 2001. This decrease was partially offset by additional depreciation from our capital
expenditures of $51.4 million since the end of the second quarter of 2001.





Interest expense decreased $3.5 million to $14.0 million in
the first six months of 2002 from $17.5 million in 2001 due primarily to lower effective interest rates on our debt, and, to a lesser extent, lower average debt balances in 2002. The average effective interest rate on all debt was 7.3% for the first
six months of 2002 compared to 9.1% in the first six months of 2001.





The provision for income taxes for the first six months of 2002 was
derived using an estimated effective income tax rate for 2002 of 38.4%. This rate is higher than the Federal statutory tax rate of 35% due to state franchise taxes and non-deductible amortization of certain franchise rights. This rate is lower than
our effective income tax rate for 2001 due to the elimination of the amortization of non-deductible goodwill under SFAS 142 effective January 1, 2002.




28




---




MANAGEMENTS DISCUSSION AND ANALYSIS OF RESULTS


OF OPERATIONS AND FINANCIAL CONDITION (continued)





As a
result of the foregoing, net income increased $5.7 million to $6.0 million for the first six months of 2002 from $0.3 million in 2001.





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 arise primarily from:





|· |  | the need to finance the opening and equipping of new restaurants;
|- |  | -----------------------------------------------------------------

|· |  | ongoing capital reinvestment in our existing restaurants;
|- |  | ---------------------------------------------------------

|· |  | the acquisition of restaurants; and
|- |  | -----------------------------------

|· |  | servicing our debt.
|- |  | -------------------




Our
operations in the first six months of 2002 generated approximately $27.3 million in cash, compared with $15.1 million in the first six months of 2001.





In the first six months of 2002 we sold five fee owned properties for $5.1 million in sale/leaseback transactions and used the proceeds from these sales to reduce debt.





Our capital expenditures are a major investment of cash, and excluding acquisitions totaled $23.7 million and $19.9 million in the first six months of 2002 and 2001, respectively. Expenditures for new
restaurant development were $9.9 million and $7.0 million in the first six months of 2002 and 2001, respectively. Our capital expenditures also include remodeling costs and capital maintenance projects for the ongoing reinvestment and enhancement of
our restaurants and totaled $13.2 million and $11.8 million in the first six months of 2002 and 2001, respectively.





In 2002, we
anticipate total capital expenditures of approximately $60 million to $62 million, excluding the cost of any acquisitions that we may make. These amounts include approximately $24 million to $26 million for the construction of new restaurants and
related real estate applicable to our three restaurant concepts as follows: $5 million for Burger King, $13 million to $14 million for Taco Cabana and $6 million to $7 million for Pollo Tropical. Also included in anticipated
2002 capital expenditures is approximately $17 million for remodeling existing Burger King restaurants and




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MANAGEMENTS DISCUSSION AND ANALYSIS OF RESULTS


OF OPERATIONS AND FINANCIAL CONDITION (continued)





approximately $5 million for expenditures related to Burger King transformation initiatives, which include new signage and drive-thru and kitchen improvements. Other anticipated 2002 capital expenditures for ongoing reinvestment in
our restaurants total approximately $13 million; with approximately $4 million applicable to our Burger King restaurants, $1.5 million for Pollo Tropical and $7.5 million for Taco Cabana, which includes $4 million for the installation of additional
grills to facilitate the introduction of grilled chicken in our Taco Cabana restaurants.





At June 30, 2002, we had total indebtedness of
$366.2 million comprised of $170.0 million of unsecured 9.5% Senior Subordinated Notes due 2008, total borrowings under our senior credit facility of $191.9 million and other debt of $4.3 million. Our senior credit facility provides for a $70
million term loan A facility, an $80 million term loan B facility and a $100 million revolving credit facility. At June 30, 2002, $138.8 was outstanding under the term loan A and B facilities and $39.3 million was available for borrowings under our
revolving credit facility, after reserving $7.6 million for letters of credit guaranteed by the facility.





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.





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 or state minimum hourly wage rates, and accordingly, changes in those rates directly affect our cost of
labor. We and the restaurant industry typically attempt to offset the effect of inflation, at least in part, through periodic menu price increases and various cost reduction programs. However, no assurance can be given that we will be able to offset
such inflationary cost increases in the future.




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PART II - OTHER INFORMATION





Item 1. Legal Proceedings





On November 16, 1998, the Equal Employment Opportunity Commission (EEOC) filed suit in the United States District Court for the Northern District of New York (the Court), under Title VII of the Civil Rights
Act of 1964, as amended, against the Company. The complaint alleges that the Company has engaged in a pattern and practice of unlawful discrimination, harassment and retaliation against former and current female employees of the Company over the
course of many years. At present, the EEOC has identified approximately 400 individuals it believes represent the class of claimants. The EEOC is seeking monetary and injunctive relief from the Company.





On June 18, 2002, we served the EEOC with a Motion for Summary Judgment (the Motion). The EEOC responded on July 23, 2002 by
opposing the Motion and serving a Cross Motion on the Company for a continuance in order to conduct additional discovery for the purpose of further responding to the Motion. The briefing on the Motion and Cross Motion should be completed by the
beginning of the fourth quarter, at which time the Motion and Cross Motion will be filed with the Court for determination.





It is not possible to predict whether we will prevail on the Motion which, subject to possible appeals by the EEOC, would effectively end the case. If we do not prevail on the Motion, there will likely be additional discovery and the
case will proceed to trial. It is too early to make an evaluation of the likelihood of an unfavorable outcome or estimate of the amount or range of potential loss. Consequently, it is not possible to predict what adverse impact, if any, this case
could have on the Companys financial condition. We intend to continue to contest the case vigorously and believe it is without merit.





Item 2. Changes in Securities and Use of Proceeds





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 8K





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





Exhibit No.10.27

Extension of Employment Agreement dated March 27, 2002 by and between Carrols
Corporation and Alan Vituli.10.28

Extension of Employment Agreement dated March 27, 2002 by and between Carrols
Corporation and Daniel T. Accordino.99.1

Certificate Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 dated August 14, 2002 by Alan Vituli.99.2

Certificate Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 dated August 14, 2002 by Paul R. Flanders.





b. There were no reports on Form 8-K filed during
the reported quarter.




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SIGNATURE





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 968 James Street Syracuse, New York 13203 (Registrant)Date:  August 14, 2002

/s/    Alan Vituli (Signature)  Alan Vituli Chairman and Chief
Executive Officer


Date:  August 14, 2002

/s/    Paul R. Flanders (Signature)  Paul R. Flanders Vice President
 Finance (Chief Financial Officer)







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