• Cost of sales consists of food, paper and beverage costs including packaging costs, less purchase discounts. Cost of sales is generally influenced by changes in commodity costs, the sales mix of items sold and the effectiveness of our restaurant-level controls to manage food and paper costs.

• Restaurant wages and related expenses include all restaurant management and hourly productive labor costs and related benefits, employer payroll taxes and restaurant-level bonuses. Payroll and related benefits are subject to inflation, including minimum wage increases and increased costs for health insurance, workers' compensation insurance and state unemployment insurance.

• Restaurant rent expense includes base rent and contingent rent on our leases characterized as operating leases, reduced by the amortization of deferred gains on sale-leaseback transactions.

• Other restaurant operating expenses include all other restaurant-level operating costs, the major components of which are royalty expenses paid to BKC, utilities, repairs and maintenance, real estate taxes and credit card fees.

• Advertising expense includes all promotional expenses including advertising payments based on a percentage of sales as required under our franchise agreements.

• General and administrative expenses are comprised primarily of
(1) salaries and expenses associated with corporate and administrative functions that support the development and operations of our restaurants,
(2) legal, auditing and other professional fees and (3) stock-based compensation expense. Historical general and administrative expenses are shown net of allocations to Fiesta for periods prior to the spin-off. Amounts charged under a transition services agreement with Fiesta subsequent to the spin-off are recorded as an offset to general and administrative expenses and were $1.0 million in the second quarter of 2012.

• EBITDA and Adjusted EBITDA. EBITDA and Adjusted EBITDA are non-GAAP financial measures. EBITDA represents net income (loss) from continuing operations, before provision (benefit) for income taxes, interest expense and depreciation and amortization. Adjusted EBITDA represents EBITDA as adjusted to exclude impairment and other lease charges, acquisition related expenses, stock compensation expense and loss on extinguishment of debt. We exclude these items from EBITDA when evaluating our operating performance and believe that Adjusted EBITDA provides a more meaningful comparison than EBITDA of our core business operating results, as well as with those of other similar companies that may have different capital structures. Management believes that EBITDA and Adjusted EBITDA, when viewed with our results of operations calculated in accordance with GAAP and our reconciliation of Adjusted EBITDA to net income (loss) from continuing operations, provide useful information about our operating performance and period-over-period growth, and provide additional information that is useful for evaluating the operating performance of our core business without regard to potential distortions. Additionally, management believes that EBITDA and Adjusted EBITDA permit investors to gain an understanding of the factors and trends affecting our ongoing cash earnings, from which capital investments are made and debt is serviced. However, EBITDA and Adjusted EBITDA are not measures of financial performance or liquidity under GAAP and, accordingly, should not be considered as alternatives to net income (loss) from continuing operations or cash flow from operating activities as indicators of operating performance or liquidity. Also, these measures may not be comparable to similarly titled captions of other companies. For a reconciliation between net income (loss) from continuing operations and EBITDA and Adjusted EBITDA see page 24.

EBITDA and Adjusted EBITDA, have important limitations as analytical tools. These limitations include the following:

•         EBITDA and Adjusted EBITDA do not reflect our capital expenditures,
          future requirements for capital expenditures or contractual commitments
          to purchase capital equipment;


•         EBITDA and Adjusted EBITDA do not reflect the interest expense or the
          cash requirements necessary to service principal or interest payments
          on our debt;


•         Although depreciation and amortization are non-cash charges, the assets
          that we currently depreciate and amortize will likely have to be
          replaced in the future, and EBITDA and Adjusted EBITDA do not reflect
          the cash required to fund such replacements; and


•         EBITDA and Adjusted EBITDA do not reflect the effect of earnings or
          charges resulting from matters that our management does not consider to
          be indicative of our ongoing operations.  However, some of these
          charges (such as impairment expense) have recurred and may reoccur.


•      Depreciation and amortization primarily includes the depreciation of fixed
       assets, including equipment, owned buildings and leasehold improvements
       utilized in our restaurants and the amortization of franchise rights and
       franchise fees.


•      Impairment and other lease charges are determined through our assessment
       of the recoverability of property and equipment and intangible assets by
       determining whether the carrying value of these assets can be recovered
       over their respective

remaining lives through undiscounted future operating cash flows. A potential impairment charge is evaluated whenever events or changes in circumstances indicate that the carrying amounts of these assets may not be fully recoverable. Lease charges are recorded for our obligations under the related leases for closed locations net of estimated sublease recoveries.
• Interest expense consists primarily of interest expense associated with our 11.25% Senior Secured Second Lien Notes due 2018 (the "Notes"), borrowings under our prior Carrols LLC senior secured credit facility and the amortization of deferred financing costs.

Recent and Future Events Affecting our Results of Operations Acquisition of Burger King Restaurants

On May 30, 2012, we completed the acquisition of 278 of BKC company-owned Burger King restaurants, which we refer to as the "acquisition", for a purchase price consisting of (i) a 28.9% equity ownership interest (subject to the issuance limitation described below), (ii) $3.8 million for cash on hand and inventory at the acquired restaurants and (iii) $9.4 million of franchise fees and $3.8 million for BKC's assignment of its right of first refusal on franchisee restaurant transfers in 20 states ("ROFR") pursuant to an Operating Agreement, which we refer to as the "operating agreement", dated as of May 30, 2012 with BKC. The amount for the ROFR is payable in quarterly payments over five years and the first quarterly payment of $0.2 million was made at closing. We also entered into new franchise agreements pursuant to the purchase and operating agreements and entered into leases with BKC for all of the acquired restaurants, including leases for 81 restaurants owned in fee by BKC and subleases for 197 restaurants under terms substantially the same as BKC's underlying leases for those properties. Pursuant to the operating agreement, we also agreed to remodel 455 Burger King restaurants to BKC's 20/20 restaurant image, including 57 restaurants in 2012, 154 restaurants in 2013, 154 restaurants in 2014 and 90 restaurants in 2015. The Series A Convertible Preferred Stock, which we refer to as the "Series A Preferred Stock", issued to BKC is subject to restrictions limiting the conversion of the Series A Preferred Stock to an amount of shares not to exceed 19.9% of the outstanding shares of our common stock as of the date of issuance (the "issuance limitation"). Pursuant to the purchase agreement, the removal of the issuance limitation is subject to obtaining the approval of our stockholders at our 2012 annual meeting or at subsequent meetings, if necessary, until stockholder approval is obtained.

The results of operations of the acquired restaurants have been included in our operating results from May 31, 2012, the day following the closing of the acquisition.
Refinancing of Outstanding Indebtedness
On May 30, 2012, we issued $150.0 million of 11.25% Senior Secured Second Lien Notes due 2018 and entered into a new senior credit facility that provides for up to $20.0 million of revolving credit borrowings (which was undrawn at closing). The net proceeds from the issuance of the Notes were used to (i) repay all outstanding borrowings under the Carrols LLC senior credit facility of $64.8 million (ii) pay $12.0 million related to the acquisition of the acquired restaurants from BKC and (iii) fees and expenses related to the offering of the Notes. The remainder of the net proceeds will be used together with anticipated operating cash flow to fund the restaurant remodeling obligations committed to in connection with the acquisition, and to fund future payments to BKC for the ROFR. Interest expense associated with this indebtedness, including the amortization of deferred financing costs, will be approximately $8.9 million in the second half of 2012.
Spin-off of Fiesta Restaurant Group, Inc. On April 16, 2012, our board of directors approved the spin-off of Fiesta, which through its subsidiaries, owns and operates the Pollo Tropical and Taco Cabana restaurant brands. In connection with the spin-off, on April 24, 2012, we and Carrols entered into several agreements that govern our post spin-off relationship with Fiesta, including a Separation and Distribution Agreement, Tax Matters Agreement, Employee Matters Agreement and Transition Services Agreement. Amounts earned by us under the Transition Services Agreement were $1.0 million in the second quarter of 2012 and are expected to be approximately $4.4 million for all of 2012.

Fiesta filed with the Securities and Exchange Commission (the "SEC") a Form 10 registration statement, File No. 001-35373, as amended, which included as an exhibit an information statement which describes the spin-off. The Form 10 registration statement, which registered the common stock of Fiesta under the Securities Exchange Act of 1934, as amended, was declared effective by the SEC on April 25, 2012.
On May 7, 2012, we completed the spin-off of Fiesta in the form of a pro rata dividend of all of the issued and outstanding common stock of Fiesta to Carrols Restaurant Group's stockholders whereby each stockholder of Carrols Restaurant Group's common stock of record on April 26, 2012 received one share of Fiesta common stock for every one share of Carrols Restaurant Group common stock held. As a result of the spin-off, Fiesta is now an independent company whose common stock is traded on

The NASDAQ Global Select Market under the symbol "FRGI." Carrols Restaurant Group's common stock continues to trade on The NASDAQ Global Market under the symbol "TAST."
The historical operating results of Fiesta prior to the spin-off are included in our operating results as income or loss from discontinued operations for all periods presented.

Operating Results from Continuing Operations Three Months Ended July 1, 2012 Compared to Three Months Ended July 3, 2011 The following table sets forth, for the three months ended July 1, 2012 and July 3, 2011, selected operating results from continuing operations as a percentage of restaurant sales for all of our restaurants, our legacy restaurants and the acquired restaurants:

2012 2011 Costs and expenses (all restaurants):
Cost of sales 31.8 % 29.9 % Restaurant wages and related expenses 30.7 % 31.0 %

Restaurant rent expense                6.5 %    6.4 %
Other restaurant operating expenses   14.9 %   15.0 %
Advertising expense                    3.8 %    4.2 %
General and administrative             6.6 %    5.5 %


                                            2012     2011
Costs and expenses (legacy restaurants):
Cost of sales                              31.1 %   29.9 %
Restaurant wages and related expenses      30.2 %   31.0 %
Restaurant rent expense                     6.1 %    6.4 %
Other restaurant operating expenses        14.5 %   15.0 %
Advertising expense                         3.7 %    4.2 %

                                            2012
Costs and expenses (acquired restaurants):
Cost of sales                              34.4 %
Restaurant wages and related expenses      32.4 %
Restaurant rent expense                     8.0 %
Other restaurant operating expenses        16.5 %
Advertising expense                         3.9 %

Since the beginning of the second quarter of 2011 through the end of the second quarter of 2012, we have opened one restaurant and closed nine restaurants. On May 30, 2012 we acquired 278 restaurants from BKC.
Restaurant Sales. Total restaurant sales in the second quarter of 2012 increased 37.8%, to $122.1 million from $88.6 million in the second quarter of 2011. Restaurant sales in the second quarter of 2012 for the acquired restaurants were $27.5 million. Comparable restaurant sales for our legacy restaurants increased 8.8% resulting from an increase in customer traffic of 4.9% and a 3.9% increase in average check, which resulted from a shift in sales mix and the effect of menu price increases of 2.3% compared to the prior year. This was partially offset by the closure of nine restaurants since the beginning of the second quarter of 2011.
Operating Costs and Expenses (percentages stated as a percentage of total restaurant sales): Cost of sales increased to 31.8% in the second quarter of 2012 from 29.9% in the second quarter of 2011 due primarily to higher commodity prices (1.3%), including higher beef and pork prices (0.8%), and higher promotional sales discounts (0.5%) offset in part by a favorable sales mix and the effect of menu price increases taken in the last twelve months of approximately 2.3%.
Restaurant wages and related expenses decreased to 30.7% in the second quarter of 2012 from 31.0% in the second quarter of 2011 due to lower medical claim costs and lower restaurant level bonus accruals.

Other restaurant operating expenses decreased to 14.9% in the second quarter of 2012 from 15.0% in the second quarter of 2011 due primarily to lower utility costs (0.2%) and the effect of higher sales volumes for our legacy restaurants on fixed operating costs, partially offset by higher credit card fees (0.2%). Advertising expense decreased to 3.8% in the second quarter of 2012 from 4.2% in the second quarter of 2011 due primarily to advertising credits received from BKC that were associated with 2012 menu enhancement initiatives. These advertising credits total $5,400 annually per restaurant for 2012 through 2015. In 2012, $2,700 per restaurant was received in the first quarter with $900 per quarter to be received in each of the remaining quarters. For 2013 through 2015 these credits will be received ratably over each year.
Restaurant rent expense increased to 6.5% in the second quarter of 2012 from 6.4% in the second quarter of 2011 due primarily to higher rent, as a percentage of restaurant sales, associated with the acquired restaurants which was 8.0% from May 31, 2012 to the end of second quarter. Rent expense, as a percentage of restaurant sales, for our legacy restaurants decreased to 6.1% from 6.4% due to the effect of higher sales volumes on fixed rental costs.
General and Administrative Expenses. General and administrative expenses increased $3.2 million in the second quarter of 2012 to $8.1 million and, as a percentage of total restaurant sales, increased to 6.6% compared to 5.5% in the second quarter of 2011. This increase was due primarily to higher administrative bonus accruals of $0.7 million, $0.8 million of legal and other costs related to the acquisition of the acquired restaurants, $0.5 million of incremental field and corporate overhead costs associated with the ongoing management and support of the acquired restaurants and $0.6 million of legal fees related to our outstanding litigation with the EEOC.
Adjusted EBITDA. As a result of the factors above Adjusted EBITDA increased 2.9% to $7.9 million in the second quarter of 2012 from $7.7 million in the second quarter of 2011.
Depreciation and Amortization Expense. Depreciation and amortization expense increased to $6.3 million in the second quarter of 2012 from $4.0 million in the second quarter of 2011 due primarily to the addition of the acquired restaurants and from point-of-sale systems installed at our legacy restaurants in 2012 and the second half of 2011.
Impairment and Other Lease Charges. Impairment and other lease charges were $0.1 million in both the second quarter of 2012 and 2011.
Interest Expense. Interest expense increased to $2.6 million in the second quarter of 2012 from $2.3 million in the second quarter of 2011 and included $0.3 million related to the settlement of an interest rate swap agreement in conjunction with the our refinancing discussed above. The weighted average interest rate on our long-term debt, excluding lease financing obligations, increased to 8.2% in the second quarter of 2012 due to the issuance of the Notes.
Provision (Benefit) for Income Taxes. The benefit for income taxes for the second quarter of 2012 was derived using an estimated effective annual income tax rate for 2012 of 42.9%, which excluded discrete tax adjustments which reduced the benefit for income taxes $0.3 million in the second quarter of 2012. The provision for income taxes for the second quarter of 2011 was derived using an estimated effective annual income tax rate for 2011 of 76.6%, which excluded discrete tax adjustments which reduced the provision for income taxes $0.1 million in the second quarter of 2011.
Net Income (Loss) from Continuing Operations. As a result of the above, net loss from continuing operations for the second quarter of 2012 was $0.9 million, or $0.04 per diluted share, compared to net income from continuing operations in the second quarter of 2011 of $0.3 million, or $0.01 per diluted share. The second quarter of 2012 included a charge of $1.5 million related to the early extinguishment of debt and $0.8 million in costs and related expenses pertaining to our acquisition of the acquired restaurants from BKC which, in the aggregate, reduced net earnings from continuing operations by $0.06 per diluted share. The second quarter of 2011 included insurance gains of $0.3 million which increased net earnings from continuing operations by $0.01 per diluted share. Six Months Ended July 1, 2012 Compared to Six Months Ended July 3, 2011 The following table sets forth, for the six months ended July 1, 2012 and July 3, 2011, selected operating results as a percentage of total restaurant sales:

Restaurant rent expense                6.6 %    6.7 %
Other restaurant operating expenses   15.4 %   15.6 %
Advertising expense                    3.5 %    4.2 %
General and administrative             6.9 %    5.9 %

In addition to the 278 acquired restaurants, since the beginning of 2011 through the second quarter of 2012 we opened two restaurants, one of which was relocated within its market area, and closed, excluding the relocated restaurant, ten restaurants.
Restaurant Sales. Restaurant sales in the first six months of 2012 increased 21.9% to $207.6 million from $170.2 million in the first six months of 2011 due to the addition of the acquired restaurants and an increase in comparable restaurant sales for our legacy restaurants of 7.4%, from both increases in customer traffic and average check in each quarter, partially offset by net closures of nine restaurants since the beginning of 2011. In the first six months of 2012 the effect of menu price increases compared to the prior year was 2.7%.
Operating Costs and Expenses (percentages stated as a percentage of total restaurant sales). Cost of sales increased to 31.3% in the first six months of 2012 from 29.6% in the first six months of 2011 due to higher commodity prices (1.4%), including higher beef and pork prices (1.0%), higher sales discounts (0.7%) and lower vendor rebates (0.2%) partially offset by a favorable sales mix compared to the first six months of 2011 from the discontinuation of the Buck Double and the effect of menu price increases taken in the last twelve months. Restaurant wages and related expenses decreased to 31.5% in the first six months of 2012 from 32.0% in the first six months of 2011 due to the effect of higher sales volumes on fixed labor costs and lower restaurant level bonus accruals. Other restaurant operating expenses decreased to 15.4% in the first six months of 2012 from 15.6% in the first six months of 2011 due primarily to lower utility costs (0.3%) and the effect of higher sales volumes on fixed operating costs partially offset by higher credit card fees (0.2%).
Advertising expense decreased to 3.5% in the first six months of 2012 from 4.2% in the first six months of 2011 due to the advertising credits received from BKC that were associated with 2012 menu enhancement initiatives. These credits were higher in the first quarter of 2012 than the remaining three quarters in the year. For all of 2012 we anticipate advertising expense to range between 4.1% and 4.3% of restaurant sales due to our commitment to BKC, as part of the purchase agreement, to begin spending 0.75% of restaurant sales for additional local advertising in markets that approve such additional spending in the second half of 2012.
Restaurant rent expense, as a percentage of total restaurant sales, decreased to 6.6% in the first six months of 2012 from 6.7% in the first six months of 2011 due primarily to the effect of higher sales volumes on fixed rental costs. General and Administrative Expenses. General and administrative expenses increased $4.3 million in the first six months of 2012 to $14.3 million and, as a percentage of total restaurant sales, increased to 6.9% from 5.9%, due primarily to higher administrative bonus accruals of $1.0 million, $1.2 million of legal and other costs related to the acquisition of the acquired restaurants, $0.5 million of incremental field and corporate overhead costs associated with the acquired restaurants and $0.6 million of legal fees related to our outstanding litigation with the EEOC.
Adjusted EBITDA. As a result of the factors above Adjusted EBITDA increased 2.3% to $11.7 million in the first six months of 2012 from $11.4 million in the first six months of 2011.
Depreciation and Amortization. Depreciation and amortization expense increased to $11.0 million in the first six months of 2012 from $7.8 million in the first six months of 2011 due primarily to the addition of the acquired restaurants and from point-of-sale systems installed at our legacy restaurants in 2012 and the second half of 2011.
Impairment and Other Lease Charges. Impairment and other lease charges were $0.1 million in the first six months of 2012 compared to $1.0 million in the first six months of 2011.
Interest Expense. Total interest expense decreased $1.1 million to $3.6 million . . .