Company Overview
We are one of the largest restaurant companies in the United States and have been operating restaurants for more than 50 years. We are the largest Burger King franchisee in the world and have operated Burger King restaurants since 1976. As of December 30, 2012, we operated 572 Burger King restaurants in 13 states. On May 30, 2012, we acquired 278 restaurants from BKC, which we refer to as the "acquired restaurants". Our restaurants operated prior to the acquisition are referred to as our "legacy restaurants". Our former indirect wholly-owned subsidiary, Fiesta Restaurant Group, Inc., which we refer to as "Fiesta", was spun off by us to our stockholders on May 7, 2012. The results of operations and cash flows of Fiesta are presented as discontinued operations in our consolidated financial statements for all periods presented. The discussion in our MD&A is focused on our continuing Burger King restaurant operations. Sales from our acquired restaurants are excluded from changes in our comparable restaurant sales in 2012.
The following is an overview of the key financial measures discussed in our results of operations:
• Restaurant sales consist of food and beverage sales, net of discounts, at our restaurants. Restaurant sales are influenced by changes in comparable restaurant sales, menu price increases, new restaurant openings and closures of restaurants. Restaurants are included in comparable restaurant sales after they have been open for 12 months. For comparative purposes, the calculation of the changes in comparable restaurant sales is based on a 52-week year.

• 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 exclude all amounts associated with Fiesta as those amounts are included in income (loss) from discontinued operations and include an offset to general administrative expenses as if the transition services agreement with Fiesta was in place for all periods presented.

• 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 and integration costs, EEOC litigation and settlement costs, 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 35.

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 from
       our acquisitions of restaurants and franchise fees paid to BKC.


•      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. There are no lease charges accrued for
       closed locations at December 30, 2012.


•      Interest expense consists primarily of interest expense associated with
       our 11.25% Senior Secured Second Lien Notes due 2018, borrowings under our
       prior Carrols LLC senior secured credit facility and the amortization of
       deferred financing costs. There were no borrowings under our new senior
       credit facility in 2012.

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

On May 30, 2012, we completed the acquisition of 278 restaurants from BKC, for a purchase price consisting of (i) a 28.9% equity ownership interest, (ii) a net cash purchase price of $12.1 million (net of $0.4 million of cash on hand) and
(iii) additional consideration of $4.3 million including $3.6 million for BKC's assignment of its right of first refusal on franchisee restaurant transfers in 20 states pursuant to an 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 on May 30, 2012. 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 by 2015. As of December 30, 2012 we had remodeled 80 restaurants to the 20/20 restaurant image. In 2013 we currently anticipate remodeling 90 to 120 restaurants.

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 prior Carrols LLC senior credit facility of $64.8 million (ii) pay $12.1 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 operating cash flow and the cash collateral account, as it becomes unrestricted, to fund the restaurant remodeling obligations committed to in connection with the acquisition of the acquired restaurants, 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 $17.8 million in 2013.
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.
Fiesta filed with 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 Exchange Act, 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 an independent public company whose common stock is traded on The NASDAQ Global Select Market under the symbol "FRGI."
The historical operating results of Fiesta are included in our operating results as income (loss) from discontinued operations for all periods presented. Operating Results from Continuing Operations The following table sets forth, for the years ended December 30, 2012, January 1, 2012, and January 2, 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:

                                                                  Year Ended
                                            December 30, 2012    January 1, 2012    January 2, 2011
Costs and expenses (all restaurants):
Cost of sales                                        32.0 %              29.9 %             29.5 %
Restaurant wages and related expenses                31.5 %              31.4 %             31.5 %
Restaurant rent expense                               7.0 %               6.5 %              6.5 %
Other restaurant operating expenses                  16.5 %              15.4 %             15.3 %
Advertising expense                                   4.1 %               4.2 %              4.2 %
General and administrative                            6.7 %               6.0 %              5.4 %

Costs and expenses (legacy restaurants):
Cost of sales                                        30.6 %              29.9 %             29.5 %
Restaurant wages and related expenses                30.6 %              31.4 %             31.5 %
Restaurant rent expense                               6.3 %               6.5 %              6.5 %
Other restaurant operating expenses                  15.0 %              15.4 %             15.3 %
Advertising expense                                   3.9 %               4.2 %              4.2 %

Costs and expenses (acquired restaurants):
Cost of sales                                        34.9 %
Restaurant wages and related expenses                33.3 %
Restaurant rent expense                               8.5 %
Other restaurant operating expenses                  19.5 %
Advertising expense                                   4.6 %

Fiscal 2012 compared to Fiscal 2011
In addition to acquiring the 278 restaurants from BKC, we closed four restaurants in 2012.
Restaurant Sales. Restaurant sales in 2012 increased 55.3% to $539.6 million from $347.5 million in 2011 due to sales at the acquired restaurants of $174.3 million and an increase in comparable restaurant sales for our legacy restaurants of 7.1%, from both increases in customer traffic of approximately 3.3% and average check of approximately 3.8%, partially offset by net closures of eleven restaurants since the beginning of 2011. In 2012, the effect of menu price increases compared to the prior year was 2.3%.

Operating Costs and Expenses (percentages stated as a percentage of restaurant sales for the restaurants being discussed). Cost of sales for all restaurants increased to 32.0% in 2012 from 29.9% in 2011. Cost of sales at our legacy restaurants increased to 30.6% in 2012 from 29.9% in 2011 due primarily to higher commodity prices (1.1%), including higher beef and pork prices (0.8%) and higher sales discounts (0.6%) partially offset by a favorable sales mix compared to 2011 and the effect of menu price increases taken in the last twelve months. Cost of sales for our acquired restaurants was 34.9% in 2012 and higher than our legacy restaurants due primarily to inefficiencies, shrinkage and higher waste and, to a much lesser extent, lower margins on soft drink sales.
Restaurant wages and related expenses for all restaurants increased to 31.5% in 2012 from 31.4% in 2011. Restaurant wages and related expenses for our legacy restaurants decreased to 30.6% in 2012 from 31.4% in 2011 due to the effects of higher sales volumes on fixed labor costs, lower medical claims costs (0.2%) and lower restaurant-level incentive bonuses. Restaurant wages and related expenses for our acquired restaurants was 33.3% and higher than our legacy restaurants due primarily to our integration efforts including an over-investment in productive labor of $1.8 million prior to implementing our labor scheduling and management systems at the acquired restaurants late in the third quarter of 2012 and the effect of fixed labor costs on lower sales volumes at our acquired restaurants.
Other restaurant operating expenses for all restaurants increased to 16.5% in 2012 from 15.4% in 2011. Other restaurant operating expenses for our legacy restaurants decreased to 15.0% in 2012 from 15.4% in 2011 due primarily to lower utility costs (0.2%) and the effect of sales increases on fixed operating costs. Other restaurant operating expenses at the acquired restaurants were 19.5% and were higher than our legacy restaurants due to higher repairs and maintenance expenses which included an estimated $2.1 million of excess repairs required to address deferred maintenance at the acquired restaurants, higher BKC royalty expense at the acquired restaurants, as a percentage of sales, and the effect of fixed operating costs on lower sales volumes at our acquired restaurants compared to our legacy restaurants.
Advertising expense for all restaurants decreased to 4.1% in 2012 from 4.2% in 2011 due to advertising credits received from BKC for investments that we made in equipment related to 2012 menu enhancement initiatives and our installation of digital menu boards.
Restaurant rent expense for all restaurants increased to 7.0% in 2012 from 6.5% in 2011 due primarily to higher rent, as a percentage of restaurant sales, associated with the acquired restaurants which was 8.5% in part reflecting the lower sales volumes at the acquired restaurants. Rent expense for our legacy restaurants decreased to 6.3% in 2012 from 6.5% in 2011 due to the effect of higher sales volumes on fixed rental costs.
General and Administrative Expenses. General and administrative expenses increased $15.1 million in 2012 to $36.1 million and, as a percentage of total restaurant sales, increased to 6.7% in 2012 from 6.0% in 2011, due primarily to an additional $5.3 million in legal and settlement costs related to the conclusion and settlement of our long-standing litigation with the EEOC, $1.2 million of legal and other costs related to the acquisition of the acquired restaurants, additional salaries and other costs for the ongoing operational oversight associated with the acquired restaurants, $0.5 million of incremental costs related to recruitment, training, travel, meetings and moving expenses related to the integration of the acquired restaurants and higher performance-based administrative bonus accruals of $0.2 million. Adjusted EBITDA. As a result of the factors above Adjusted EBITDA was $25.0 million in 2012 compared to $25.4 million in 2011. Adjusted EBITDA excludes a total of $11.4 million of integration costs and legal and other transaction costs related to the acquisition of the acquired restaurants and EEOC litigation and settlement costs mentioned above. For a reconciliation between net income
(loss) from continuing operations and EBITDA and Adjusted EBITDA see page 35. Depreciation and Amortization. Depreciation and amortization expense increased to $26.3 million in 2012 from $16.1 million in 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 $1.0 million in 2012 compared to $1.3 million in 2011 and consisted of impairment charges associated with underperforming restaurants. Interest Expense. Interest expense increased $5.4 million to $12.8 million in 2012 due to the impact of our refinancing and issuance of the Notes in May of 2012 associated with the acquisition of the acquired restaurants. The weighted average interest rate on our long-term debt, excluding lease financing obligations, was 9.6% in 2012 compared to 6.0% in 2011 due to the issuance of the Notes in 2012. Provision (Benefit) for Income Taxes. The benefit for income taxes for 2012 has an effective annual income tax rate of 34.9%. In 2012, we recorded a valuation allowance of $2.1 million against deferred tax assets associated with certain state net operating loss carryforwards which reduced the benefit for income taxes. Legislation which reinstated the Work Opportunity Tax

Credit ("WOTC") for 2012 was passed after our fiscal 2012 year-end. As a result, we will recognize the benefit of the 2012 WOTC tax credits in the first quarter of 2013. This credit is estimated to be approximately $1.0 million. The benefit for income taxes for 2011 has an effective annual income tax rate of 76.0%. Net Income (loss) from Continuing Operations. As a result of the foregoing, net loss from continuing operations was $18.8 million in 2012, or $0.83 per diluted share, compared to a net loss from continuing operations of $0.5 million in 2011, or $0.02 per diluted share. As discussed above, net loss from continuing operations in 2012 included acquisition and integration-related costs, costs for the conclusion and settlement of the EEOC litigation and a loss from our refinancing completed in May 2012. In aggregate these charges were approximately $12.9 million or $0.35 per diluted share net of tax. Net loss from continuing operations in 2011 included charges of $1.9 million, or $0.05 per diluted share after tax, related to the acquisition, the EEOC litigation and a loss on the 2011 refinancing.
A reconciliation of EBITDA and Adjusted EBITDA to net income (loss) from continuing operations for the years ended December 30, 2012, January 1, 2012, and January 2, 2011 is as follows:

                                                            Year Ended
                                    December 30, 2012     January 1, 2012      January 2, 2011
Net income (loss) from continuing
operations                         $         (18,816 )   $          (524 )   $           1,810
Provision (benefit) for income
taxes                                        (10,093 )            (1,661 )                 807
Interest expense                              12,764               7,353                 8,957
Depreciation and amortization                 26,321              16,058                15,354
EBITDA                                        10,176              21,226                26,928
Impairment and other lease charges               977               1,293                   709
Acquisition and integration costs              6,042                 458                     -
EEOC litigation and settlement
costs                                          5,343                 190                    16
Stock compensation expense                       925               1,037                   884
Loss on extinguishment of debt                 1,509               1,244                     -
Adjusted EBITDA                    $          24,972     $        25,448     $          28,537

Fiscal 2011 Compared to Fiscal 2010
In 2011, we opened two new Burger King restaurants. One of the new Burger King restaurants was a relocation of an existing restaurant within its market area. During the same period we closed eight Burger King restaurants, excluding the restaurant relocated.
Restaurant Sales. Total restaurant sales in 2011 decreased 2.7% to $347.5 million from $357.1 million, due to a decrease in comparable restaurant sales of 1.4% from lower customer traffic and the closure, excluding relocations, of fifteen Burger King restaurants since the beginning of 2010. The decrease in customer traffic was partially offset by an increase in average check of 6.6% from sales mix changes and the effect of menu price increases in 2011 of 4.3%. Operating Costs and Expenses (percentages stated as a percentage of restaurant sales). Cost of sales increased to 29.9% in 2011 from 29.5% in 2010 due primarily to increases in commodity costs (2.4%) including beef costs (1.2%) and higher promotional discounting (0.3%) which were partially offset by the effect of menu price increases and a favorable sales mix primarily from the discontinuation of the Buck Double in 2011.
Restaurant wages and related expenses decreased to 31.4% in 2011 from 31.5% in 2010 due to leveraging management and productive labor efficiencies and lower restaurant level bonus accruals. These factors were substantially offset by the effect of lower sales volumes on fixed labor costs and higher workers compensation and medical claim costs (0.3%).
Other restaurant operating expenses increased to 15.4% in 2011 from 15.3% in 2010 due primarily to the effect of lower sales volumes on fixed operating costs. Advertising expense was 4.2% in both 2011 and 2010.
Restaurant Rent Expense. Restaurant rent expense, as a percentage of total restaurant sales, was 6.5% in both 2011 and 2010.
General and Administrative Expenses. General and administrative expenses increased $1.8 million in 2011 to $21.0 million and, as a percentage of total restaurant sales, increased to 6.0% from 5.4% in 2010 due primarily to an increase of $1.2 million in performance-based administrative bonus accruals, and higher stock-based compensation expense of $0.2 million.

Adjusted EBITDA. As a result of the factors above, Adjusted EBITDA decreased to $25.4 million in 2011 from $28.5 million in 2010.
Depreciation and Amortization. Depreciation and amortization expense increased . . .