UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, DC 20549





FORM 10-Q





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




| |  | For the quarterly period ended September 30, 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

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 12(b)-2 of The Exchange Act). Yes  ̈ No x





Common stock, par value $1.00, outstanding at November 11, 2002: 10 shares







---




PART I





ITEM 1FINANCIAL INFORMATION





CARROLS CORPORATION AND
SUBSIDIARIES


CONSOLIDATED BALANCE SHEETS


(in thousands of
dollars)





September 30, 2002

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

$
1,796

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


1,168


1,741Inventories


4,757


5,094Prepaid rent


2,083


2,115Prepaid expenses and other current assets


4,002


4,262Refundable income taxes


122


1,133Deferred income taxes


6,797


6,797Total current assets


20,725


23,547Property and equipment, at cost less accumulated depreciation of $142,987 and $124,744, respectively


224,808


213,346Franchise rights, at cost less accumulated amortization of $46,704 and $43,341, respectively


91,660


94,844Intangible assets, at cost less accumulated amortization of $10,052 and $10,056, respectively


122,394


122,433Deferred income taxes


3,844


8,384Other assets


10,488


11,449Total assets

$
473,919

$
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)





September 30, 2002


December 31, 2001(unaudited)LIABILITIES and STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable

$
13,617


$
16,620Accrued interest


5,451



1,518Accrued payroll, related taxes and benefits


15,011



12,872Other liabilities


16,090



15,706Current portion of long-term debt


11,828



10,029Total current liabilities


61,997



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


349,788



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


4,847



3,881Accrued postretirement benefits


2,537



2,310Other liabilities


30,467



32,397Total liabilities


449,636



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


(202
)


(9,430
)Total stockholders equity


24,283



15,055Total liabilities and stockholders equity

$
473,919


$
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 SEPTEMBER 30, 2002 AND 2001


(in thousands of dollars)





2002

2001(unaudited)Revenues:Restaurant sales

$
167,196

$
170,132Franchise fees and royalty revenues


384


399Total revenues


167,580


170,531Costs and expenses:Cost of sales


46,571


50,524Restaurant wages and related expenses


49,904


48,998Other restaurant operating expenses


32,467


32,718Advertising expense


7,915


8,176General and administrative


8,921


8,714Depreciation and amortization


9,980


10,971Total operating expenses


155,758


160,101Income from operations


11,822


10,430Interest expense


6,839


8,046Income before income taxes


4,983


2,384Provision for income taxes


1,793


1,964Net income

$
3,190

$
420





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







4




---




CARROLS CORPORATION AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF OPERATIONS


NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001


(in thousands of dollars)





2002

2001(unaudited)Revenues:Restaurant sales

$
497,658

$
491,493Franchise fees and royalty revenues


1,102


1,187Total revenues


498,760


492,680Costs and expenses:Cost of sales


138,829


143,952Restaurant wages and related expenses


147,701


143,582Other restaurant operating expenses


96,675


95,760Advertising expense


21,968


21,553General and administrative


28,204


26,358Depreciation and amortization


29,776


32,040Total operating expenses


463,153


463,245Income from operations


35,607


29,435Interest expense


20,822


25,594Income before income taxes


14,785


3,841Provision for income taxes


5,554


3,097Net income

$
9,231

$
744





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







5




---




CARROLS CORPORATION AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF CASH FLOWS


NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001


(in thousands of dollars)





2002


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

$
9,231


$
744Adjustments to reconcile net income to net cash provided from operating activities:Depreciation and amortization


29,776



32,040Deferred income taxes


4,540



1,089Change in operating assets and liabilities


2,684



(477
)Loss on disposal of property and equipment


35



Net cash provided from operating activities


46,266



33,396Cash flows used for investing activities:Capital expenditures:New restaurant development


(19,219
)


(13,764
)Restaurant remodeling


(11,198
)


(10,435
)Other restaurant expenditures


(7,456
)


(7,573
)Corporate and information systems


(1,124
)


(1,704
)Acquisition of restaurants






(1,612
)Total capital expenditures


(38,997
)


(35,088
)Properties purchased for sale-leaseback


(925
)


Proceeds from sales of property and equipment


9



26Net cash used for investing activities


(39,913
)


(35,062
)Cash flows provided from (used for) financing activities:Proceeds (payments) on revolving credit facility, net


(4,500
)


5,800Proceeds (payments) on other notes payable, net


(726
)


358Principal payments on term loans


(6,375
)


(5,250
)Principal payments on capital leases


(427
)


(390
)Proceeds from sale-leaseback transactions


5,066



Net cash provided from (used for) financing activities


(6,962
)


518Decrease in cash and cash equivalents


(609
)


(1,148
)Cash and cash equivalents, beginning of period


2,405



2,712Cash and cash equivalents, end of period

$
1,796


$
1,564





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 September 30, 2002 and for the three and nine months ended September 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 nine months ended September 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 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):





September 30, 2002

December 31, 2001Goodwill

$
121,335

$
121,335Trademarks


232


242Other


827


866$
122,394

$
122,433





Amortization expense of goodwill, which is no longer amortized
effective January 1, 2002, was $1,241,000 and $3,724,000 for the three and nine months ended September 30, 2001, respectively.








|3. |  | Income Taxes
|-- |  | ------------




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





2002

2001Current

$
1,014

$
2,008Deferred


4,540


1,089$
5,554

$
3,097







7




---

CARROLS CORPORATION AND SUBSIDIARIES


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)








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.





Burger King

Pollo Tropical

Taco Cabana

Other


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

$
95,986

$
25,824

$
45,770

$



$
167,580Cost of sales


25,351


7,859


13,361






46,571Restaurant wages and related expenses


30,063


6,880


12,961






49,904Depreciation and amortization


6,380


815


1,558


1,227



9,980Income (loss) from operations


4,475


3,867


4,707


(1,227
)


11,822Capital expenditures, excluding acquisitions


6,993


2,674


5,087


536



15,290September 30, 2001:Revenues

$
99,432

$
24,315

$
46,784

$



$
170,531Cost of sales


28,936


7,786


13,802






50,524Restaurant wages and related expenses


29,769


5,949


13,280






48,998Depreciation and amortization


6,178


698


1,818


2,277



10,971Income (loss) from operations


4,657


4,211


3,839


(2,277
)


10,430Capital expenditures, excluding acquisitions


8,769


3,598


2,152


647



15,166







8




---




CARROLS CORPORATION AND SUBSIDIARIES


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)








Burger King

Pollo Tropical

Taco Cabana

Other


ConsolidatedNine Months Ended (dollars in thousands):September 30, 2002:Revenues

$
288,778

$
76,230

$
133,752

$



$
498,760Cost of sales


76,502


23,130


39,197






138,829Restaurant wages and related expenses


89,987


19,400


38,314






147,701Depreciation and amortization


19,183


2,356


4,917


3,320



29,776Income (loss) from operations


12,219


12,936


13,772


(3,320
)


35,607Capital expenditures, excluding acquisitions


17,882


8,399


11,592


1,124



38,997September 30, 2001:Revenues

$
283,619

$
74,123

$
134,938

$



$
492,680Cost of sales


81,078


23,688


39,186






143,952Restaurant wages and related expenses


87,477


17,562


38,543






143,582Depreciation and amortization


17,743


1,957


5,636


6,704



32,040Income (loss) from operations


10,293


13,523


12,323


(6,704
)


29,435Capital expenditures, excluding acquisitions


18,518


6,324


6,941


1,693



33,476Identifiable Assets:At September 30, 2002

$
211,586

$
37,820

$
67,275

$
157,238


$
473,919At December 31, 2001


215,249


31,668


60,776


166,310



474,003








|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 nine months ended September 30, 2002, the Company paid $0.5 million in lease
liabilities for the closed restaurants and the remaining lease liability at September 30, 2002 was $0.5 million. The Company has also paid $0.4 million in the nine months ended September 30, 2002 pertaining to other exit costs resulting in a
September 30, 2002 reserve balance of $0.3 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. The Company
will perform its impairment evaluation annually at December 31. Separable intangible assets with defined lives will continue to be amortized over their useful lives.







9




---




CARROLS CORPORATION AND SUBSIDIARIES


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)








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 determined the impact of adopting SFAS 143 to be immaterial on the
Companys financial statements.





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.





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 September 30, 2002 and December 31, 2001 and for the
three-month and nine-month periods ended September 30, 2002 and 2001. Debt and goodwill allocated to subsidiaries are presented on an push-down accounting basis.







10




---




CARROLS CORPORATION AND SUBSIDIARIES


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)


CONSOLIDATING BALANCE SHEET


September 30, 2002


(in thousands of dollars)


(unaudited)





Parent Company Only

Guarantor Subsidiaries


Combined TotalASSETSCurrent Assets:Cash and cash equivalents

$
1,363

$
433


$
1,796Trade and other receivables, net


232


936



1,168Inventories


3,370


1,387



4,757Prepaid rent


1,258


825



2,083Prepaid expenses and other current assets


1,196


2,806



4,002Refundable income taxes


122






122Deferred income taxes


6,797






6,797Total current assets


14,338


6,387



20,725Property and equipment, net


116,369


108,439



224,808Franchise rights, net


91,660






91,660Intangible assets, net


1,535


120,859



122,394Intercompany receivable (payable)


180,498


(180,498
)


Deferred income taxes


3,844






3,844Other assets


7,988


2,500



10,488Total assets

$
416,232

$
57,687


$
473,919LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Accounts payable

$
7,441

$
6,176


$
13,617Accrued interest


5,451






5,451Accrued payroll, related taxes and benefits


9,612


5,399



15,011Other liabilities


7,444


8,646



16,090Current portion of long-term debt


11,530


298



11,828Total current liabilities


41,478


20,519



61,997Long-term debt, net of current portion


348,827


961



349,788Deferred income, sale/leaseback of real estate


4,847






4,847Accrued postretirement benefits


2,537






2,537Other liabilities


16,519


13,948



30,467Total liabilities


414,208


35,428



449,636Stockholders equity


2,024


22,259



24,283Total liabilities and stockholders equity

$
416,232

$
57,687


$
473,919







11




---




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







12




---




CARROLS CORPORATION AND SUBSIDIARIES


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)


CONSOLIDATING STATEMENT OF
OPERATIONS


Three Months Ended September 30, 2002


(in
thousands of dollars)


(unaudited)





Parent Company Only


Guarantor Subsidiaries

Combined TotalRevenues:Restaurant sales

$
95,986


$
71,210

$
167,196Franchise fees and royalty revenues






384


384Total revenues


95,986



71,594


167,580Costs and expenses:Cost of sales


25,351



21,220


46,571Restaurant wages and related expenses


30,063



19,841


49,904Other restaurant operating expenses


20,247



12,220


32,467Advertising expense


4,337



3,578


7,915General and administrative


5,133



3,788


8,921Depreciation and amortization


7,176



2,804


9,980Total operating expenses


92,307



63,451


155,758Income from operations


3,679



8,143


11,822Interest expense


6,763



76


6,839Intercompany allocations


(1,736
)


1,736


Income (loss) before income taxes


(1,348
)


6,331


4,983Provision (benefit) for income taxes


(475
)


2,268


1,793Net income (loss)

$
(873
)

$
4,063

$
3,190







13




---




CARROLS CORPORATION AND SUBSIDIARIES


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)


CONSOLIDATING STATEMENT OF
OPERATIONS


Three Months Ended September 30, 2001


(in
thousands of dollars)


(unaudited)





Parent Company Only


Guarantor Subsidiaries

Combined TotalRevenues:Restaurant sales

$
99,432


$
70,700

$
170,132Franchise fees and royalty revenues






399


399Total revenues


99,432



71,099


170,531Costs and expenses:Cost of sales


28,936



21,588


50,524Restaurant wages and related expenses


29,769



19,229


48,998Other restaurant operating expenses


20,445



12,273


32,718Advertising expense


4,429



3,747


8,176General and administrative


5,018



3,696


8,714Depreciation and amortization


6,946



4,025


10,971Total operating expenses


95,543



64,558


160,101Income from operations


3,889



6,541


10,430Interest expense


7,880



166


8,046Intercompany allocations


(1,737
)


1,737


Income (loss) before income taxes


(2,254
)


4,638


2,384Provision (benefit) for income taxes


(173
)


2,137


1,964Net income (loss)

$
(2,081
)

$
2,501

$
420







14




---




CARROLS CORPORATION AND SUBSIDIARIES


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)


CONSOLIDATING STATEMENT OF
OPERATIONS


Nine Months Ended September 30, 2002


(in
thousands of dollars)


(unaudited)





Parent Company Only


Guarantor Subsidiaries

Combined TotalRevenues:Restaurant sales

$
288,778


$
208,880

$
497,658Franchise fees and royalty revenues






1,102


1,102Total revenues


288,778



209,982


498,760Costs and expenses:Cost of sales


76,502



62,327


138,829Restaurant wages and related expenses


89,987



57,714


147,701Other restaurant operating expenses


60,902



35,773


96,675Advertising expense


12,731



9,237


21,968General and administrative


17,254



10,950


28,204Depreciation and amortization


21,563



8,213


29,776Total operating expenses


278,939



184,214


463,153Income from operations


9,839



25,768


35,607Interest expense


20,582



240


20,822Intercompany allocations


(5,208
)


5,208


Income (loss) before income taxes


(5,535
)


20,320


14,785Provision (benefit) for income taxes


(1,753
)


7,307


5,554Net income (loss)

$
(3,782
)

$
13,013

$
9,231







15




---




CARROLS CORPORATION AND SUBSIDIARIES


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)


CONSOLIDATING STATEMENT OF
OPERATIONS


Nine Months Ended September 30, 2001


(in
thousands of dollars)


(unaudited)





Parent Company Only


Guarantor Subsidiaries

Combined TotalRevenues:Restaurant sales

$
283,619


$
207,874

$
491,493Franchise fees and royalty revenues






1,187


1,187Total revenues


283,619



209,061


492,680Costs and expenses:Cost of sales


81,078



62,874


143,952Restaurant wages and related expenses


87,477



56,105


143,582Other restaurant operating expenses


60,187



35,573


95,760Advertising expense


12,007



9,546


21,533General and administrative


14,834



11,524


26,358Depreciation and amortization


20,034



12,006


32,040Total operating expenses


275,617



187,628


463,245Income from operations


8,002



21,433


29,435Interest expense


25,151



443


25,594Intercompany allocations


(5,211
)


5,211


Income (loss) before income taxes


(11,938
)


15,779


3,841Provision (benefit) for income taxes


(3,846
)


6,943


3,097Net income (loss)

$
(8,092
)

$
8,836

$
744







16




---




CARROLS CORPORATION AND SUBSIDIARIES


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)


CONSOLIDATING STATEMENT OF CASH
FLOWS


Nine Months Ended September 30, 2002


(in thousands of
dollars)


(unaudited)





Parent Company Only


Guarantor Subsidiaries


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

$
(3,782
)

$
13,013


$
9,231Adjustments to reconcile net income (loss) to net cash provided from operating activities:Loss on disposal of property and equipment


11



24



35Depreciation and amortization


21,563



8,213



29,776Deferred income taxes


4,540







4,540Changes in operating assets and liabilities


4,202



(1,518
)


2,684Net cash provided from operating activities


26,534



19,732



46,266Cash flow used for investing activities:Capital expenditures:New restaurant development


(5,888
)


(13,331
)


(19,219
)Restaurant remodeling


(7,918
)


(3,280
)


(11,198
)Corporate and information systems


(530
)


(594
)


(1,124
)Other restaurant expenditures


(4,076
)


(3,380
)


(7,456
)Total capital expenditures


(18,412
)


(20,585
)


(38,997
)Purchased properties for sale/leaseback


(925
)






(925
)Proceeds from sales of property and equipment


9







9Net cash used for investing activities


(19,328
)


(20,585
)


(39,913
)Cash flows used for financing activities:Payments on revolving credit facility, net


(4,500
)






(4,500
)Principal payments on term loans


(6,375
)






(6,375
)Payments on other notes payable, net


(726
)






(726
)Principal payments on capital leases


(229
)


(198
)


(427
)Proceeds from sale/leaseback transactions


5,066







5,066Net cash used for financing activities


(6,764
)


(198
)


(6,962
)Net increase (decrease) in cash and cash equivalents


442



(1,051
)


(609
)Cash and cash equivalents, beginning of year


921



1,484



2,405Cash and cash equivalents, end of period

$
1,363


$
433


$
1,796







17




---




CONSOLIDATING STATEMENT OF CASH FLOWS


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)


Nine Months Ended September 30,
2001


(in thousands of dollars)


(unaudited)





Parent Company Only


Guarantor Subsidiaries


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

$
(8,092
)

$
8,836


$
744Adjustments to reconcile net income (loss) to net cash provided from operating activities:Depreciation and amortization


20,034



12,006



32,040Deferred income taxes


(2,774
)


3,863



1,089Changes in operating assets and liabilities


11,354



(11,831
)


(477
)Net cash provided from operating activities


20,522



12,874



33,396Cash flow used for investing activities:Capital expenditures:New restaurant development


(4,553
)


(9,211
)


(13,764
)Restaurant remodeling


(9,832
)


603



(10,435
)Corporate and information systems


(1,061
)


(643
)


(1,704
)Other restaurant expenditures


(4,120
)


(3,453
)


(7,573
)Acquisition of restaurants


(1,612
)






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


21



5



26Net cash used for investing activities


(21,157
)


(13,905
)


(35,062
)Cash flows provided from financing activities:Proceeds from revolving credit facility, net


5,800







5,800Proceeds from other notes payable, net


358







358Principal payments on term loans


(5,250
)






(5,250
)Principal payments on capital leases


(390
)






(390
)Net cash provided from financing activities


518







518Net decrease in cash and cash equivalents


(117
)


(1,031
)


(1,148
)Cash and cash equivalents, beginning of year


785



1,927



2,712Cash and cash equivalents, end of period

$
668


$
896


$
1,564




18




---

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 530 restaurants in 16 states at September 30, 2002. We are the largest Burger King franchisee, 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 September 30, 2002, we operated 358 Burger King restaurants located in 13 Northeastern, Midwestern and Southeastern states. Since September 30, 2001 we have opened six additional Burger King
restaurants and closed seven 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
22 new Pollo Tropical restaurants and at September 30, 2002 we had 58 company owned Pollo Tropical restaurants in Florida and 23 franchised Pollo Tropical restaurants, 18 of which are in Puerto Rico.





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 September 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 September 30, 2001, we have opened three new Taco Cabana restaurants and closed three 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, proposes that all
companies 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.




19




---



MANAGEMENTS DISCUSSION AND ANALYSIS OF


RESULTS OF OPERATIONS AND FINANCIAL CONDITION(Continued)







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.





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 consult with outside legal counsel 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.





We must evaluate our recorded goodwill for
impairment under SFAS 142, Goodwill and Other Intangible Assets, on an annual basis. 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.





Recent Accounting Pronouncements





In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS 142, Goodwill and Other Intangible Assets, which replaces 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 $1,241,000 and $3,724,000 for the three and nine months ended September 30, 2001, respectively.




20




---



MANAGEMENTS DISCUSSION AND ANALYSIS OF


RESULTS OF OPERATIONS AND FINANCIAL CONDITION(Continued)







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. On an ongoing basis, the Company
has elected to conduct its annual impairment review of goodwill and intangible assets as of December 31.





In June 2001, the FASB issued
SFAS 143, Accounting for Asset Retirement Obligations. This new standard, effective in 2003 requires entities to recognize the fair value of an asset retirement obligation in the period that 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. The adoption of SFAS 143 will have no material impact on our financial statements.





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 cannot be restated under SFAS 146.





Results of Operations





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





The following table sets forth, for the three months ended September 30, 2002 and 2001, selected operating results as a


|percentage |  | of restaurant sales:
|---------- |  | --------------------

|
|

2002


2001Restaurant sales:Burger King

57.4
%

58.5
%Pollo Tropical

15.3


14.1Taco Cabana

27.3


27.4100.0


100.0Costs and expenses:Cost of sales

27.9


29.7Restaurant wages and related expenses

29.8


28.8Other restaurant expenses including advertising

24.2


24.0General and administrative

5.3


5.1Depreciation and amortization

6.0


6.4Income from restaurant operations

6.8
%

5.9
%





Restaurant Sales





Total restaurant sales for the third quarter decreased 1.7% to $167.2 million in 2002 from $170.1 million in 2001. Burger King restaurant sales in the third quarter decreased $3.4 million to
$96.0 million in 2002 due primarily to a sales decrease of 3.6% at our comparable Burger King restaurants (those restaurants operating for the entirety of both periods). This decrease was due in part to decreased Burger King promotional activities
in the third quarter of 2002 compared to 2001. Pollo Tropical restaurant sales increased $1.5 million, or 6.4%, to $25.6 million in the third quarter of 2002 due to the opening of seven additional restaurants since the end of the third quarter of
2001. Sales at our comparable Pollo Tropical restaurants in the third quarter of 2002, however, decreased 3.8% due to the economic effects of declining tourism in our




21




---



MANAGEMENTS DISCUSSION AND ANALYSIS OF


RESULTS OF OPERATIONS AND FINANCIAL CONDITION(Continued)




Orlando and South Florida markets. Taco Cabana restaurant sales in the third quarter decreased $1.0 million to $45.7 million in 2002 from $46.7 million in 2001. This decrease was due to a slight
sales decrease of 0.3% at our comparable Taco Cabana restaurants in the third quarter of 2002 and 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 third quarter of 2002 from 29.7% in 2001. Burger King cost of sales, as a percentage of Burger King restaurant sales, decreased to 26.4% in the
third quarter of 2002 from 29.1% in 2001. This decrease was due to significantly lower promotional sales discounts in the third 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 7.8% decrease in beef commodity prices in the third quarter of 2002. Pollo Tropical cost of sales, as a percentage of Pollo Tropical restaurant sales, decreased to
30.7% in the third quarter of 2002 from 32.4% in 2001 due to lower chicken breast 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, decreased to 29.3% in the
third quarter of 2002 from 29.6% in 2001 due to lower cheese costs and slightly lower promotional sales discounts in the third quarter of 2002, partially offset by higher contracted beef costs in 2002.





Restaurant wages and related expenses, as a percentage of total restaurant sales, increased to 29.8% in the third quarter of 2002 from 28.8% in 2001. Burger King
restaurant wages and related expenses, as a percentage of Burger King restaurant sales, increased to 31.3% in the third quarter of 2002 from 29.9% in 2001 due to the effects of lower Burger King sales volumes in the third quarter of 2002 on fixed
labor costs. Pollo Tropical restaurant wages and related expenses, as a percentage of Pollo Tropical restaurant sales, increased to 26.8% in the third quarter of 2002 from 24.8% in 2001 due to the effect of lower sales volumes in the third quarter
of 2002 on fixed labor costs and, to a lesser extent, higher workers compensation and medical insurance costs in the third 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 Cabana restaurant sales, decreased slightly to 28.4% in the third 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.





Other restaurant operating expenses (which includes advertising) as a percentage of total restaurant sales, increased to 24.2%
in the third quarter of 2002 from 24.0% in 2001. Burger King other restaurant operating expenses, as a percentage of Burger King restaurant sales, increased to 25.7% in the third quarter of 2002 from 25.0% in 2001 due to the effect of lower sales
volumes on fixed costs and higher utility costs, due to hot weather in the third quarter of 2002 in our Burger King markets. Pollo Tropical other restaurant operating expenses, as a percentage of Pollo Tropical restaurant sales, increased to 19.9%
in the third quarter of 2002 from 18.5% in 2001 due to the effect of lower comparable restaurant sales volumes on fixed costs, the timing of advertising expenses in 2002 and higher maintenance expenses related to enhancing our restaurants. Taco
Cabana other restaurant operating expenses, as a percentage of Taco Cabana restaurant sales, decreased to 23.5% in the third quarter of 2002 from 24.7% in 2001 due primarily to lower advertising costs in 2002 related to the timing of promotions and
lower utility costs.





General and administrative expenses, as a percentage of total restaurant sales, increased to 5.3% in the third
quarter of 2002 from 5.1% in 2001 due, in part, to the effect of lower Burger King sales volumes in the third quarter of 2002.





Earnings
before interest, taxes and depreciation and amortization (EBITDA) increased to $21.8 million in the third quarter of 2002 from $21.4 million in 2001. As a percentage of total revenues, EBITDA margins increased to 13.0% in the third
quarter of 2002 from 12.5% in 2001 as a result of the factors discussed above.




22




---



MANAGEMENTS DISCUSSION AND ANALYSIS OF


RESULTS OF OPERATIONS AND FINANCIAL CONDITION(Continued)







Depreciation and amortization decreased $1.0 million in the third quarter of 2002 from the
third 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 third quarter of 2001. This decrease was offset by additional depreciation from our capital
expenditures of $53.1 million since the end of the third quarter of 2001.





Interest expense decreased $1.2 million to $6.8 million in the
third quarter of 2002 from $8.0 million in 2001 due primarily to lower effective interest rates on our debt, and, to a lesser extent, lower average debt balances in the third quarter of 2002. The average effective interest rate on all debt was 7.3%
for the third quarter of 2002 compared to 8.3% in the third quarter of 2001.





The provision for income taxes for the third quarter of
2002 was derived using an estimated effective income tax rate for 2002 of 37.6%. 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.





As a result of the foregoing, net income for the third quarter of 2002 increased to $3.2 million from $0.4 million in the third quarter of 2001.





Nine Months Ended September 30, 2002 Compared to Nine Months Ended September 30, 2001.





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


|
|

2002


2001Restaurant sales:Burger King

58.0
%

57.7
%Pollo Tropical

15.2


14.9Taco Cabana

26.8


27.4100.0


100.0Costs and expenses:Cost of sales

27.9


29.3Restaurant wages and related expenses

29.7


29.2Other restaurant expenses including advertising

23.8


23.9General and administrative

5.7


5.4Depreciation and amortization

6.0


6.5Income from restaurant operations

6.9
%

5.7
%





Restaurant Sales





Total restaurant sales for the first nine months of 2002 increased $6.2 million to $497.7 million from $491.5 million in 2001. Burger King restaurant sales increased $5.2 million, or 1.8%,
to $288.8 million in the first nine months of 2002 from $283.6 million in 2001. This increase was due to a sales increase at our comparable Burger King restaurants of 0.3% for the first nine months of 2002 and an increase of four average Burger King
restaurants open in 2002. Pollo Tropical restaurant sales increased $2.2 million, or 3.0%, to $75.4 million in the first nine months 2002 due to the opening of seven additional restaurants since the end of the third quarter of 2001. Sales at our
comparable Pollo Tropical restaurants in the first nine months of 2002, however, declined 5.0% due to the economic effects of declining tourism in our Florida markets since the September 11 tragedy. Taco Cabana restaurant sales decreased to $133.4
million in the first nine months of 2002 from $134.7 million in 2001. A sales increase at our comparable Taco Cabana restaurants of 1.2% in the first nine months of 2002 was offset by the closure of seven restaurants in the Phoenix, Arizona market,
primarily in the first quarter of 2002.




23




---



MANAGEMENTS DISCUSSION AND ANALYSIS OF


RESULTS OF OPERATIONS AND FINANCIAL CONDITION(Continued)







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 nine months of 2002 from 29.3% in 2001. Burger
King cost of sales, as a percentage of Burger King restaurant sales, decreased to 26.5% in the first nine months of 2002 from 28.6% in 2001. This decrease was due to significantly lower promotional sales discounts in the first nine 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 30.7% in the first nine months of 2002 from 32.4% in 2001 due to lower chicken breast 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 nine months of 2002 from 29.1% 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 29.7% in the first nine months of
2002 from 29.2% in 2001. Burger King restaurant wages and related expenses, as a percentage of Burger King restaurant sales, increased to 31.2% in the first nine months of 2002 from 30.8% in 2001 due to higher state unemployment tax rates and higher
restaurant level incentives in 2002, offset in part by menu price increases in 2001. Pollo Tropical restaurant wages and related expenses, as a percentage of Pollo Tropical restaurant sales, increased to 25.7% in the first nine months of 2002 from
24.0% in 2001 due to the effect of lower sales volumes on fixed labor costs and higher workers compensation and medical insurance costs. Taco Cabana restaurant wages and related expenses, as a percentage of Taco Cabana restaurant sales, increased
slightly to 28.7% in the first nine months of 2002 from 28.6% in 2001 due primarily to labor rate increases.





Other restaurant operating
expenses (which includes advertising) as a percentage of total restaurant sales, decreased slightly to 23.8% in the first nine months of 2002 from 23.9% in 2001. Burger King other restaurant operating expenses, as a percentage of Burger King
restaurant sales, decreased slightly to 25.4% in the first nine months of 2002 from 25.5% 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 19.6% in the first nine months of 2002 from 18.6% in 2001. This increase was due to the effect of lower comparable restaurant sales volumes in 2002 on fixed costs, higher maintenance
expenses related to enhancing our restaurants in 2002 and an insurance gain of $0.4 million in 2001, partially offset by lower utility costs in 2002. Taco Cabana other restaurant operating expenses, as a percentage of Taco Cabana restaurant sales,
decreased to 22.7% in the first nine months of 2002 from 23.3% in 2001 due primarily to lower utility costs in 2002 and lower advertising costs due to the timing of promotions.





General and administrative expenses, increased $1.8 million in the first nine months of 2002 compared to 2001 due primarily to higher administrative bonus levels in 2002. As a percentage of total
restaurant sales, general and administrative expenses increased to 5.7% in the first nine months of 2002 from 5.5% in 2001.





Earnings
before interest, taxes and depreciation and amortization (EBITDA) increased 6.4% to $65.4 million in the first nine months of 2002 from $61.5 million in 2001. As a percentage of total revenues, EBITDA margins increased to 13.1% in the
first nine months of 2002 compared to 12.5% in 2001 as a result of the factors discussed above.





Depreciation and amortization decreased
$2.3 million in the first nine months of 2002 compared to 2001 due to the elimination of goodwill amortization under SFAS 142 beginning January 1, 2002. Goodwill amortization was $3.7 million in the first nine months of 2001. This decrease was
partially offset by additional depreciation from our capital expenditures of $53.1 million since the end of the third quarter of 2001.





Interest expense decreased $4.8 million to $20.8 million in the first nine months of 2002 from $25.6 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 nine months of 2002 compared to 8.8% in the first nine months of 2001.




24




---



MANAGEMENTS DISCUSSION AND ANALYSIS OF


RESULTS OF OPERATIONS AND FINANCIAL CONDITION(Continued)







The provision for income taxes for the first nine months of 2002 was derived using an
estimated effective income tax rate for 2002 of 37.6%. 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.





As a result of the foregoing, net income increased $8.5 million to $9.2 million for the first nine months of 2002 from $0.7 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 nine months of 2002 generated approximately $46.3 million in cash, compared with $33.4 million in the first nine months of 2001.





In the first nine 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 $39.0 million and $33.5 million in the first nine months of 2002 and 2001, respectively.
Expenditures for new restaurant development were $19.2 million and $13.8 million in the first nine 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 $18.7 million and $18.0 million in the first nine months of 2002 and 2001, respectively.





In 2002, we anticipate total capital expenditures of approximately $55 million to $60 million, including approximately $26 million to $28 million for the construction of new restaurants and related real estate applicable to our three
restaurant concepts as follows: $8 million to $9 million for Burger King, $11 million to $12 million for Taco Cabana and $7 million for Pollo Tropical. Also included in anticipated 2002 capital expenditures is approximately $11 million to $12
million for remodeling existing Burger King restaurants and approximately $3 million to $4 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 $12 million to $13 million; with approximately $4 million applicable to our Burger King restaurants, $2 million to $3 million for Pollo Tropical
and $6 million for Taco Cabana, which includes $3.5 million to $4 million for the remodeling of our Taco Cabana restaurants in Austin, Texas including the installation of additional grills related to the introduction of grilled chicken.





At September 30, 2002, we had total indebtedness of $361.6 million comprised of $170.0 million of unsecured 9.5% Senior Subordinated
Notes due 2008, total borrowings under our senior credit facility of $187.6 million and other debt of $4.0 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




25




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MANAGEMENTS DISCUSSION AND ANALYSIS OF


RESULTS OF OPERATIONS AND FINANCIAL CONDITION(Continued)




revolving credit facility. At September 30, 2002, $136.6 was outstanding under the term loan A and B facilities and $41.8 million was available for borrowings under our revolving credit facility,
after reserving $7.2 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.





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, 2001
with respect to the Companys market risk sensitive instruments.





ITEM 4CONTROLS AND PROCEDURES





As required by Rule 13a-15 under the Exchange Act, within the 90 days prior to the filing date of this report, the Company carried out an evaluation,
under the supervision and with the participation of the Companys management, including the Companys Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Companys disclosure
controls and procedures. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Companys disclosure controls and procedures are effective. There were no significant changes in the Companys
internal controls or in other factors that could significantly affect these controls, nor any significant deficiencies or material weaknesses in such controls requiring corrective actions, subsequent to the date of their evaluation.




26




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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





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




27




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Item 6.    Exhibits and Reports on Form 8K





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








Exhibit No.10.29

Carrols Corporation Retirement Savings Plan dated July 1, 2002.10.30

Addendum incorporating EGTRRA Compliance Amendment to Carrols Corporation Retirement Savings Plan dated September 12, 2002.99.1

Certificate Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 dated November 13, 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 November 13, 2002 by Paul R.
Flanders.








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




28




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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:  November 13, 2002

/S/    ALAN
VITULI (Signature)Alan Vituli Chairman and Chief Executive Officer

















Date:  November 13, 2002

/S/    PAUL R. FLANDERS (Signature)Paul R. Flanders Vice PresidentFinance (Chief Financial Officer)










29




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CERTIFICATIONS





I, Alan Vituli, certify that:





|1. |  | I have reviewed this quarterly report on Form 10-Q of Carrols Corporation;
|-- |  | --------------------------------------------------------------------------




|2. |  | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




|3. |  | Based on my knowledge, the financial statements and other financial information included in this quarterly report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




|4. |  | The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | a) |  | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | b) |  | evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly
report (the Evaluation Date); and
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | c) |  | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------




|5. |  | The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit
committee of the registrants board of directors (or persons performing the equivalent function):
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | a) |  | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process,
summarize and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | b) |  | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------




|6. |  | The registrants other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------







Date:  November 13, 2002

/S/    ALAN VITULIAlan Vituli Chairman and Chief Executive Officer




30




---

CERTIFICATIONS





I, Paul R. Flanders, certify that:





|1. |  | I have reviewed this quarterly report on Form 10-Q of Carrols Corporation;
|-- |  | --------------------------------------------------------------------------




|2. |  | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




|3. |  | Based on my knowledge, the financial statements and other financial information included in this quarterly report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




|4. |  | The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | a) |  | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | b) |  | evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly
report (the Evaluation Date); and
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | c) |  | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------




|5. |  | The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit
committee of the registrants board of directors (or persons performing the equivalent function):
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | a) |  | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process,
summarize and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | b) |  | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------




|6. |  | The registrants other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------







Date:  November 13, 2002

/S/    PAUL R. FLANDERSPaul R. Flanders Vice PresidentFinance (Chief Financial Officer)







31